Trade and economic shocks Flashcards
Economic shocks
Economic shock: unexpected and significant events that lead to a sudden and
substantial impact on key indicators, such as GDP growth, inflation, unemployment,
interest rates, and exchange rates.
Demand-side shock: a sudden change in AD
Supply-side shock: a sudden change in AS
Positive shock: a shock that boosts the economy
Negative shock: a shock that causes a recession or increase in unemployment or
inflation
External shock: a shock that comes from global events outside the economy
Internal shock: a shock that comes from within an economy
Features of a recession
Falling real GDP: a sustained decline in a country’s GDP over at least
two consecutive quarters (six months). Economic output shrinks as
businesses produce less, consumers spend less, and investment
declines.
Rising unemployment: businesses reduce production and cut back
on hiring, leading to job losses and a rise in cyclical unemployment.
Disinflation: falling demand and a weaker labour market often lead
– perhaps with a time lag – to a reduction in the rate of price
inflation.
Reduced business investment: businesses tend to scale back their
investment during a recession because of weak or falling demand.
Risk to government finances: government borrowing and national
debt may rise as government spends to support the economy.
Economic scarring
Economic scarring: can reduce the medium/long run potential output
of the economy
* Businesses may scrap unused/obsolete capital
* Workers who lose their jobs may also lose some skills reducing their
productivity (labour hysteresis)
* Increase in business failures
* Fall in the financial capacity to lend
Depression v recession
An economic depression is a more severe and prolonged economic
downturn than an economic recession.
* It can persist for several years
* Unemployment rates can reach very high levels and remain elevated for an
extended period.
* Long-term unemployment and underemployment are common features
* Depressions can include severe banking and financial crises, with widespread
bank failures, credit contractions, and disruptions to the financial system.
Economic shocks
Economic shock: unexpected and significant events that lead to a sudden and
substantial impact on key indicators, such as GDP growth, inflation, unemployment,
interest rates, and exchange rates.
Demand-side shock: a sudden change in AD
Supply-side shock: a sudden change in AS
Positive shock: a shock that boosts the economy
Negative shock: a shock that causes a recession or increase in unemployment or
inflation
External shock: a shock that comes from global events outside the economy
Internal shock: a shock that comes from within an economy
Demand & supply side shocks
Demand-side - negative
* Economic downturn in a major trading
partner
* Unexpected tax increases/cuts in welfare
* Financial crisis causing a credit crunch
* Bigger than expected rise in unemployment
(NB: Opposite for positive AD shocks)
Supply-side - negative
* Steep rise in energy and/or commodity/raw
material prices
* Lockdown due to a pandemic
* Natural disasters
* Unexpected breakthroughs in production
technology (could be positive)
(NB: Opposite for positive AS shocks)
Examples of shocks
Global financial crisis 2007-9; pandemic; volatile global energy & commodity prices;
slowdown in China; climate change & extreme weather events; increased
protectionism, Brexit, currency volatility etc
Depression v recession
An economic depression is a more severe and prolonged economic
downturn than an economic recession.
* It can persist for several years
* Unemployment rates can reach very high levels and remain elevated for an
extended period.
* Long-term unemployment and underemployment are common features
* Depressions can include severe banking and financial crises, with widespread
bank failures, credit contractions, and disruptions to the financial system.
Evaluation of shocks
Impact of the economic shock depends on:
* The size of the shock & the scale of the shock (regional, global?)
* Likely multiplier effects (positive/negative depending on the shock)
* How temporary/permanent the shock is
* Who the winners and losers are
* How effectively the government responds to the shock
* Opportunities v threats created by the shock
