Revision - External Shocks

This streamed revision presentation takes a look at external shocks

The UK is an open economy, one that is highly integrated within the global economy. From one perspective this increases the sensitivity of our economy to outside events for example a recession or slowdown in key export markets will inevitably have downside effects on demand, output and employment in the UK.

Shocks to aggregate demand

One of the really interesting things about being a macroeconomist is that lots of unexpected events can happen which cause changes in the level of demand, output and employment. The headwinds can alter direction with great speed leading to uncertainty about where the economy is heading. These events are called “shocks”. Some of the causes of AD shocks are as follows:
o A big rise or fall in the exchange rate – affecting export demand and having follow-on effects on output, employment, incomes and profits of businesses linked to export industries.
o A recession in one of our major trading partners which affects demand for our exports of goods and services.
o A slump in the housing market or a big change in share prices.
o An event such as the credit crunch (global financial crisis) – involving a fall in the amount of credit available for borrowing by households and businesses.
o An unexpected cut or an unexpected rise in interest rates or change in government taxation and spending – for example the shock of deep cuts in state spending expected in 2011 and beyond.

However, integration with other nations also provides opportunities to smooth our own cycle – depending on what is happening to cycles, exchange rates and policy changes elsewhere. Much rests on the flexibility of our economy to be able to absorb external shocks and bounce back when the opportunity arises.

- Demand & supply-side shocks
- Quantitative easing
- Government policy responses