In
economics
Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and interac ...
, a shock is an unexpected or unpredictable event that affects an economy, either positively or negatively. Technically, it is an unpredictable change in
exogenous factors—that is, factors unexplained by an economic model—which may influence
endogenous
Endogeny, in biology, refers to the property of originating or developing from within an organism, tissue, or cell.
For example, ''endogenous substances'', and ''endogenous processes'' are those that originate within a living system (e.g. an ...
economic variables.
The response of economic variables, such as
GDP and
employment
Employment is a relationship between two party (law), parties Regulation, regulating the provision of paid Labour (human activity), labour services. Usually based on a employment contract, contract, one party, the employer, which might be a cor ...
, at the time of the shock and at subsequent times, is measured by an
impulse response function.
Types of shocks
A
technology shock 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 proce ...
.
If the shock is due to constrained supply, it is termed a
supply shock 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 deliberately caused by humans. The term ''accident'' implies that the event may have been caused by Risk assessment, unrecognized or unaddressed risks. Many researchers, insurers ...
s or
disaster
A disaster is an event that causes serious harm to people, buildings, economies, or the environment, and the affected community cannot handle it alone. '' Natural disasters'' like avalanches, floods, earthquakes, and wildfires are caused by na ...
s occur. The
2008 Western Australian gas crisis resulting from a pipeline explosion at
Varanus Island is one example.
A
demand shock is a sudden change of the pattern of private expenditure, especially of
consumption spending by
consumers
A consumer is a person or a group who intends to order, or use purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. Th ...
or of
investment spending by businesses.
A preference shock is a change in
preferences 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 refers to the amount of products and services available for purchase with a certain currency unit. For example, if you took one unit of cash to a store in the 1950s, you could buy more products than you could now, showing that th ...
for many consumers); or that production costs begin to exceed corporate revenues (e.g. following energy price hikes).
A
monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability (normally interpreted as a low and stable rat ...
shock occurs when a
central bank
A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...
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, ...
or
money supply
In macroeconomics, money supply (or money stock) refers to the total volume of money held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circulation (i ...
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 variab ...
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 or ...
or
taxation
A tax is a mandatory financial charge or levy imposed on an individual or legal person, legal entity by a governmental organization to support government spending and public expenditures collectively or to Pigouvian tax, regulate and reduce nega ...
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 (or lotto) 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 som ...
.
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,
populist,
leftist, or ceasing to participate in the electoral process. Positive economic shocks are linked to an increase in trust in government institutions.
See also
*
1973 oil crisis
In October 1973, the Organization of Arab Petroleum Exporting Countries (OAPEC) announced that it was implementing a total oil embargo against countries that had supported Israel at any point during the 1973 Yom Kippur War, which began after Eg ...
*
Dynamic stochastic general equilibrium
Dynamic stochastic general equilibrium modeling (abbreviated as DSGE, or DGE, or sometimes SDGE) is a macroeconomics, macroeconomic method which is often employed by monetary and fiscal authorities for policy analysis, explaining historical time-s ...
*
Shock therapy
*
Social risk management
*
Technology shock
*
Vector autoregression
References
{{Authority control
Macroeconomics
Market trends
Economic events