Do Endogenous or Exogenous Shocks Have the Greater Impact on Economic Output
Do Endogenous or Exogenous Shocks Have the Greater Impact on Economic Output
The UK is an open economy meaning that a high percentage of our national income and output comes from trading with the rest of the world; we are highly integrated within the global economy.
Endogenous models explain cyclical fluctuations in terms of internal events or policies i.e. changes which lie within the economic system; For example: if the economy is already near full employment (at Yf), with only a small output gap, any increase in AD will result in price inflation, but little increase in output. With a small output gap and an inelastic Aggregate Supply curve the inflationary effects of a sustained increase in Aggregate Demand will be considerable.
This increase in AD clearly poses an economic problem, as the economy cannot cope with the extra demand. However, Classical economists would argue that the macro-economy will self-adjust back to the full employment level.
Exogenous models argue that turning points in an economic cycle happen because of external demand-side or supply-side ‘shocks’ from beyond the economic system. These shocks create a disequilibrium for an economy and lead output and prices to deviate from a forecast path.
Exogenous shocks can be split into two main groups; demand side (affecting the components of demand in one or more countries) and Supply-side shocks (affecting costs and prices in different countries).
There are various demand side shocks which have affected the UK in recent years; for example; the integration of Brazil, Russia, Indonesia, India and China (BRIC) and Vietnam plus the former communist countries of Eastern Europe into the world economy. Also the ICT revolution in the mid-late 1990s and the dotcom boom-bust from 200 onwards also affected the UK economy output. Both of these changes in aggregate demand brought by a demand side shock can create disequilibrium in the economy, which takes growth, prices and
The UK is an open economy meaning that a high percentage of our national income and output comes from trading with the rest of the world; we are highly integrated within the global economy.
Endogenous models explain cyclical fluctuations in terms of internal events or policies i.e. changes which lie within the economic system; For example: if the economy is already near full employment (at Yf), with only a small output gap, any increase in AD will result in price inflation, but little increase in output. With a small output gap and an inelastic Aggregate Supply curve the inflationary effects of a sustained increase in Aggregate Demand will be considerable.
This increase in AD clearly poses an economic problem, as the economy cannot cope with the extra demand. However, Classical economists would argue that the macro-economy will self-adjust back to the full employment level.
Exogenous models argue that turning points in an economic cycle happen because of external demand-side or supply-side ‘shocks’ from beyond the economic system. These shocks create a disequilibrium for an economy and lead output and prices to deviate from a forecast path.
Exogenous shocks can be split into two main groups; demand side (affecting the components of demand in one or more countries) and Supply-side shocks (affecting costs and prices in different countries).
There are various demand side shocks which have affected the UK in recent years; for example; the integration of Brazil, Russia, Indonesia, India and China (BRIC) and Vietnam plus the former communist countries of Eastern Europe into the world economy. Also the ICT revolution in the mid-late 1990s and the dotcom boom-bust from 200 onwards also affected the UK economy output. Both of these changes in aggregate demand brought by a demand side shock can create disequilibrium in the economy, which takes growth, prices and