Economic Cycles - Supply-Side Shocks

In this video we explore adverse and positive supply-side shocks and analyse their impact on key macroeconomic indicators.

All economies experience economic shocks. Some come from within the domestic economy but many flow from outside an economic system – we call these external shocks. They lead to a macroeconomic disequilibrium affecting both growth, inflation and other key macroeconomic indicators.

A supply-side shock affects producers across a range of industries

Shocks can be adverse or positive

An adverse supply-side shock is an event that causes an unexpected increase in costs or disruption to production. This will cause the short-run aggregate supply curve to shift to the left, leading to higher inflation and lower real national output.

A positive supply shock is an event that leads to lower supply costs. This will cause short-aggregate supply to shift to the right and, in theory, this will help control inflationary pressures and cause an expansion of real national output

All economies experience economic shocks. But the impact will vary from country to country. For example, rising world food prices for low-income nations with high import dependency can have hugely damaging effects and can reverse progress made in cutting poverty.

The micro and macroeconomic impact of a supply-shock depends in part on whether it is a temporary disruption or reflects longer-term supply problemssuch as those caused by conflict, persistent trade wars, or a lengthy global health crisis.