Saturday, 23 April 2011

Causes of cyclical instability in an economy such as the UK

While economic growth in the long run may be a smooth curve that trends upwards, in the short-term there are large, regular fluctuations in growth. This is due to the economic cycle, which is the trend for economies to experience high levels of growth, then a slowdown followed by recession, and finally, a recovery.

Cyclical instability can occur due to shocks to either demand or supply.

Demand side shocks are unexpected events that influence the demand in the economy, they can be caused by other countries as the UK trades with countries from all over the world. They can be caused by:
  -Significant rise or fall in the exchange rates in the short term

  -Changes in the rate of economic growth with trading partners
  -Shifts in AD
  -A boom in capital expenditure

Supply side shocks affect the costs and prices of supply and changes may be due to
  -Technological changes
  -Natural disasters which may limit the supply of crops etc and therefore change their prices
  -Political situations that may affect the price of goods such as oil and gas. An example of this can be seen when Russia cut off the supply of gas to Ukraine for political reasons

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