Trade cycle & economic shocks Flashcards

1
Q

What are features of a recession?

A
  • Falling real GDP
  • Rising unemployment
  • Disinflation
  • Reduced business investment
  • Risk to government finances
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2
Q

How is falling real GDP a feature of a recession?

A

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.

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3
Q

How is rising unemployment a feature of a recession?

A

businesses reduce production and cut back
on hiring, leading to job losses and a rise in cyclical unemployment.

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4
Q

How is disinflation a feature of a recession?

A

falling demand and a weaker labour market often lead
– perhaps with a time lag – to a reduction in the rate of price
inflation.

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5
Q

How is reduced business investment a feature of a recession?

A

businesses tend to scale back their
investment during a recession because of weak or falling demand

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6
Q

How is a risk to government finances a feature of a recession?

A

government borrowing and national
debt may rise as government spends to support the economy

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7
Q

Explain economic scarring?

A

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

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8
Q

Explain an economic depression

A

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.

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9
Q

What is an economic shock?

A

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.

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10
Q

What is a demand side shock?

A

Sudden change in AD

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11
Q

What is a supply side shock?

A

Sudden change in AS

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12
Q

What is a positive shock?

A

a shock that boosts the economy

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13
Q

What is a negative shock?

A

A shock that causes a recession or increase in unemployment or
inflation

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14
Q

What is a external shock?

A

a shock that comes from global events outside the economy

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15
Q

What is an internal shock?

A

a shock that comes from within an economy

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16
Q

List negative demand side shocks?

A
  • 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
17
Q

List positive supply side shocks?

A
  • 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)
18
Q

What are examples of shocks?

A

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

19
Q

What does the impact of a shock depend on?

A
  • 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