Economic shocks (Theme 4)

4.5.1

what is uncertainty?

a change/event where there is no way of calculating its likelihood of occurring

what is risk?

When a change/event is expected and the probability of occurrence can be calculated using past data

what are shocks?

shocks are unexpected and unpredictable events that have a major impact on the economy (in terms of both AD and AS)

brexit

more free to negotiate trade deals with other countries

we now face rules of orgin, more restrictions on movement of labour

said to have caused a 4% loss in productivity in the long-run

oil prices

supply from russia was cut off, demand plummeted during covid

AS shifts up due to rising costs - inflation and less investment

Wage price spiral so AS and AD continues to shift up. The Bank of England will put up interest rates to shift AD in and so AS shifts in further

Net oil producers are more likely to benefit from a rise in prices. Revenue increases due to inelastic PED. Exports go up so AD increases

Effects on inequality and on currency - Value of the £ might go down

Effects on budget deficit - subsidies to help consumers

how do businesses and government manage risk?

first, identify the risk

governments:

• use ad policies to manage spending

• welfare payments

• laws and regulation

• data collection

businesses:

• insure against it

• spread risk

• minimise risk - research, cashflow

• minimise consequences

• Forward markets

  • hedge against currency exchange rate fluctuations and commodity price volatility

  • but shifts may happen which favour businesses

more specific examples

look for suppliers

can costs be passed onto customers?

how reliant are they on imports and exports

(macro) winners and losers

CONFIDENCE

short term spending that pays off in long run