Trade cycle & economic shocks Flashcards
What are features of a recession?
- Falling real GDP
- Rising unemployment
- Disinflation
- Reduced business investment
- Risk to government finances
How is falling real GDP a feature of a recession?
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.
How is rising unemployment a feature of a recession?
businesses reduce production and cut back
on hiring, leading to job losses and a rise in cyclical unemployment.
How is disinflation a feature of a recession?
falling demand and a weaker labour market often lead
– perhaps with a time lag – to a reduction in the rate of price
inflation.
How is reduced business investment a feature of a recession?
businesses tend to scale back their
investment during a recession because of weak or falling demand
How is a risk to government finances a feature of a recession?
government borrowing and national
debt may rise as government spends to support the economy
Explain 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
Explain an economic depression
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.
What is an 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.
What is a demand side shock?
Sudden change in AD
What is a supply side shock?
Sudden change in AS
What is a positive shock?
a shock that boosts the economy
What is a negative shock?
A shock that causes a recession or increase in unemployment or
inflation
What is a external shock?
a shock that comes from global events outside the economy
What is an internal shock?
a shock that comes from within an economy
