Question

Please define a business cycle and explain types of economic shocks that may cause a business cycle? Which types of goods are hit hardest by a business cycle?

Answer 1

A business cycle is a series of cycles of economic expansion and contraction. As shown in figure below, points a to d show economic expansion. Real GDP goes up with time and unemployment falls. From d to e shows that economy is having recession where real GDP goes down, unemployment increases during this time. Currently, world is recovering from recessionary impact started in 2008 due to subprime crisis in USA.

ns.on リ t et y to 0u or

Economic shocks are unpredictable events that affect an economy. Generally, it is caused by uncontrolled variables. Example : Supply side shock: For example- OPEC(Organization of petroleum exporting countries) controlled oil supply in 1960s and oils supply went down causing supply side shock.

There can be a demand side shock as well, when demand changes abruptly.

Goods affected hardest by recession are industries producing capital goods(like machines) and consumer durable goods (like tvs) because consumers can postpone decisions to buy and many a times capital good producing industries are monopolies which are not ready to lower prices.