economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...

, a shock is an unexpected or unpredictable event that affects an economy, either positively or negatively. Technically, it is an unpredictable change in

exogenous In a variety of contexts, exogeny or exogeneity () is the fact of an action or object originating externally. It contrasts with endogeneity or endogeny, the fact of being influenced within a system. Economics In an economic model, an exogeno ...

factors—that is, factors unexplained by an economic model—which may influence

endogenous Endogenous substances and processes are those that originate from within a living system such as an organism, tissue, or cell. In contrast, exogenous substances and processes are those that originate from outside of an organism. For example, es ...

economic variables. The response of economic variables, such as

GDP Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...

and

employment Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any othe ...

, at the time of the shock and at subsequent times, is measured by an

impulse response function In signal processing and control theory, the impulse response, or impulse response function (IRF), of a dynamic system is its output when presented with a brief input signal, called an impulse (). More generally, an impulse response is the reacti ...

Types of shocks

technology shock Technology shocks are sudden changes in technology that significantly affect economic, social, political or other outcomes. In economics, the term technology shock usually refers to events in a macroeconomic model, that change the production fu ...

is the kind resulting from a technological development that affects

productivity Productivity is the efficiency of production of goods or services expressed by some measure. Measurements of productivity are often expressed as a ratio of an aggregate output to a single input or an aggregate input used in a production proces ...

. If the shock is due to constrained supply, it is termed a

supply shock A supply shock is an event that suddenly increases or decreases the supply of a commodity or service, or of commodities and services in general. This sudden change affects the equilibrium price of the good or service or the economy's general pr ...

and usually results in price increases for a particular product. Supply shocks can be produced when

accident An accident is an unintended, normally unwanted event that was not directly caused by humans. The term ''accident'' implies that nobody should be blamed, but the event may have been caused by unrecognized or unaddressed risks. Most researcher ...

s or

disaster A disaster is a serious problem occurring over a short or long period of time that causes widespread human, material, economic or environmental loss which exceeds the ability of the affected community or society to cope using its own resources ...

s occur. The 2008 Western Australian gas crisis resulting from a pipeline explosion at

Varanus Island Varanus Island is the largest of the Lowendal Islands, an archipelago off the north west coast of Western Australia, near Karratha in the Pilbara region. The island is approximately from the mainland coast. It is located at .Gazetteer of Austral ...

is one example. A

demand shock In economics, a demand shock is a sudden event that increases or decreases demand for goods or services temporarily. A positive demand shock increases aggregate demand (AD) and a negative demand shock decreases aggregate demand. Prices of goods ...

is a sudden change of the pattern of private expenditure, especially of

consumption Consumption may refer to: *Resource consumption *Tuberculosis, an infectious disease, historically * Consumption (ecology), receipt of energy by consuming other organisms * Consumption (economics), the purchasing of newly produced goods for curren ...

spending by

consumers A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. T ...

or of

investment spending In macroeconomics, investment "consists of the additions to the nation's capital stock of buildings, equipment, software, and inventories during a year" or, alternatively, investment spending — "spending on productive physical capital such as mach ...

by businesses. A preference shock is a change in

preferences In psychology, economics and philosophy, preference is a technical term usually used in relation to choosing between alternatives. For example, someone prefers A over B if they would rather choose A than B. Preferences are central to decision theo ...

over consumption or leisure. An inflationary shock happens when prices of commodities increase suddenly (e.g., after a decrease of government subsidies) while not all salaries are adjusted immediately throughout society (this results in a temporary loss of

purchasing power Purchasing power is the amount of goods and services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it would have been possible to buy a greater number of items than would ...

for many consumers); or that production costs begin to exceed corporate revenues (e.g. following energy price hikes). DJIA during 911

monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...

shock occurs when a

central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...

changes, without sufficient advance warning, its pattern of

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...

money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include Circulation (curren ...

control. A

fiscal policy In economics and political science, fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variables ...

shock is an unexpected change of

government spending Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting, the acquisition by governments of goods and services for current use, to directly satisfy the individual o ...

taxation A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal person, legal entity) by a governmental organization in order to fund government spending and various public expenditures (regiona ...

amounts. A news shock is a change in current expectations of future technological progress, which could be induced by new information about potential technological developments. In the context of microeconomics, shocks are also studied at the household level, such as health, income, and consumption shocks. Negative individual and household economic shocks can result from job loss, for example, while positive shocks can come from winning the

lottery A lottery is a form of gambling that involves the drawing of numbers at random for a prize. Some governments outlaw lotteries, while others endorse it to the extent of organizing a national or state lottery. It is common to find some degree of ...

. For example, in development microeconomics the relationship between household income shocks and household levels of consumption is studied to understand a household's ability to insure itself (testing the full-insurance hypothesis).

Political impact

Economic shocks impact political preference. The experience of negative shocks such as job loss causes individuals to favor redistributive policies and broader social policies. Some evidence shows that negative economic shocks cause individuals to lose faith in political systems, though this erosion of trust is often temporary, rebounding over time. A narrow portion of voters may change their voting patterns in response to shock, which can include support for candidates and policies that are

antiestablishment An anti-establishment view or belief is one which stands in opposition to the conventional social, political, and economic principles of a society. The term was first used in the modern sense in 1958, by the British magazine ''New Statesman'' ...

populist Populism refers to a range of political stances that emphasize the idea of "the people" and often juxtapose this group against " the elite". It is frequently associated with anti-establishment and anti-political sentiment. The term developed ...

leftist Left-wing politics describes the range of political ideologies that support and seek to achieve social equality and egalitarianism, often in opposition to social hierarchy. Left-wing politics typically involve a concern for those in soci ...

, or ceasing to participate in the electoral process. Positive economic shocks are linked to an increase in trust in government institutions.

References

{{Authority control Macroeconomics Market trends Economic events

Types of shocks

Political impact

See also

References