Examining types of macroeconomic shocks

Macroeconomic shocks make reference to any disturbance in the economy to internal or external factors. These shocks are generally unpredictable and came up without any transmission and affect almost all the macroeconomic aggregates of the current economic climate. Theses shocks might occur credited to various reason such as petrol price hikes, abrupt fall in demand for any product, unpredicted fall season in supply of any item, imposition of new tariff obstacles in exporting countries, street to redemption in domestic tariff barriers of the local overall economy, change in stock prices of large companies contributing a significant part to the home countries national income and so many more factors like this.

There are two types of macroeconomic shock they are supply surprise and demand shock. First we consider the supply shock, which is thought as any sudden surge or fall in resource any item any given economic region in a given span of the time. This surge or fall affects the macroeconomic aggregates in domestic as well as much related economies. When the supply of a good rises or falls suddenly then its prices land or goes up respectively and hence moving the demand curve to right or kept. The diagram below shows the have an impact on of reduction in supply which results into rise in cost of the product.

Similarly demand shock means that there surely is quick increase or decrease in demand of any item due to that your price of an good decreases or rises. The demand impact may due to various reasons like tax cut which causes individuals having more throw-away income with them, this leads to more expenses by them and therefore upsurge in demand of any product. As drawn for the supply surprise similar diagram can be attracted for demand distress causing a transfer in the demand curve of this commodity.

Transmission mechanism refers to propagation of shocks in one country to another country through international trade in goods and services. When both countries are large then your transmission cannot be determined properly as disturbances may occur anticipated to domestic monetary problems.

Several theories of macroeconomic have turned out that cross country business cycle correlation exists; this means the macroeconomic aggregates across countries are directly correlated. Many empirical studies are there to verify this. The main reason of the is transmission system and exogenous shocks.

Nature and Origin

The research study discussed here's from Canada which has effects on whole USA as well as Japan and Korea. It originated in Canada in 2003 spread all over. It was a demand surprise. The food industry was the most hampered industry, also export and import sector was damaged badly and confronted a significant loses. The share prices of some of the major food giants dipped dramatically leading to a huge loses.

Immediately following the SARS threat that was a major impact to the Canadian Current economic climate, it faced its first mad cow disease of the ten years sending effect to whole of the THE UNITED STATES. The incidence dates back to June, 2003; whenever a cow in Alberta, Canadas top cattle producing province and also most significant meat exporter to america, was found to be struggling of mad cow disease biologically known as brain spending bovine spongiform encephalopathy. Actually the test was conducted on 31 cows for the reason that province, picked in an exceedingly fair way with no bias. It was off course a local shock which afflicted the Canadian market as well whole of THE UNITED STATES.


The mad cow disease news actually came out and disseminate across the continent on 21th June, 2003. Then it took a past due convert macroeconomic aggregates upsides down. Canada export sector was damaged the most because beef was a major export. The domestic macroeconomic shock showed its color and resulted into bans on Canadian beef and also sales of cattle over the continent. Food industry was also significantly affected because meat is a major ingredient for many of the meals items. This even influenced the macroeconomic massive McDonalds Firm, the hamburger large.

The government came into action swiftly as it was a significant issue. In seriousness of the matter comes from the actual fact that beef is a significant of the meals over the continent. Also beef is a complementary and supplementary item to numerous of the laundry. If proper attention had not been paid at right time then it would cause a dip in hazardous results like fatalities of thousands.

According to government requests cow with disease were slaughtered, in order that they remain from the food chain and don't adversely affect the life span cycle. Total amounts of cow slaughtered were 150.

Economic Ramifications of the Source Shock

It was like bad media coming from all sources to Canada as not only Canadas own meat, food, export, Import companies declined but Canada was isolated. U. S. , Japan, Korea all banned the transfer of Canadian beef. Japan and Korea also suspended the import of diary products from Canada.

Canada give food to almost 60% of the meat dependence on the continent and gathered a amount of C$3. 8 billion in total annual farm cash receipts. Following the great shock it was shocks propagating everywhere On Wall Road, stocks of Tyson Foods Inc. , the biggest U. S. beef processor, dropped 5 percent on the news headlines and McDonald's sank nearly 7 percent, which made making stock lose in Dow Jones on Tuesday.

U. S. cattle futures crashed their allowable daily limit on the Chicago Mercantile Exchange. The Canadian buck, which includes been soaring in recent times, dropped on the mad cow statement before regaining lost earth. Experts imagine mad cow disease may have been propagate by cows in Britain who had been given the remains of sheep contaminated with scrapie. Other researchers say the condition arose from a mutation in a cow in the 1970s. More than 80 people in Britain and European countries have died from the individuals variant of mad cow. Which means this was very deadly and could have serious impacts on individuals lives.

The Model

Suppose we consider Canada as the small open economy which includes international linkages to the globe. International linkages make reference to volume of tradeoff Canada with remaining world. In addition, it depends on frequency of trade. Level of trade refers to the amount of goods traded whereas frequency of trade identifies the amount of times the trade is done between Canada and other countries. This means when level of trade is large then the export and import sector booms and earns large amount of revenue for the country.

Also, due to the international linkages and correlation between different countries macroeconomic aggregates influencing each other, there are other effects like results on many macroeconomic aggregates, effects on the worthiness of the local currency in conditions of the countrys money, effect on show prices of large companies.

To develop the model for Canada knowing the macroeconomic supply shock because of the mad cow disease producing disruption in the economy we consider other macroeconomic aggregates also. These aggregates are largely afflicted by the great shock stated in the financial.

Some of the supposition before making the model is:-

The current economic climate is without friction for both domestic and international capital market segments.

The residents of the economy are large in number.

The residents are also similar in economic patterns.

There is large dependence of economy on other economies.

Now, consider some of the variable

D1 = initial demand for meat by Canada and other nations

S1 = original supply of beef from Canada

P1 = primary price of the beef

D2 = demand for meat after the cow disease

S2 = way to obtain beef after the cow disease

P2 = price of meat after the disease

Suppose the original demand for the beef is D1, which aggregates the total demand in Canada as well as the United States. Then the source was S1 which total the source to Canada and remaining world and the purchase price was P1. Once the cows were found to be experiencing mad cow disease and the demand for beef crashed and hence dropped to large extend. There is fall in demand for raw beef as well as demand for beef as a fresh material for most items, the major being hamburgers. The demand then dropped to D2 and also to fall in volume offered to S2. For this reason price also dropped to P2. Canada being one of the greatest providers and exporters of beef was harmed terribly by this macroeconomic surprise. It leads to a significant change in financial variables in Canada. This surprise was domestic in characteristics as it originated from Canada.

Empirical evidence

There are empirical research to show that there was fall in GDP in both Canada and U. S in 2003 this is the year where the shock occurred. The annexure 1 fastened with this article describes this. It could be seen that there in land in GDP both for USA as well as Canada in the entire year of the impact. In 2003 the GDP of both the countries dropped and shows the harmful ramifications of the demand shock. The final outcome can be attracted that the demand shock that originated from the mad cow diseases in 2003 get spread around through the continent. The annexure 2 and 3 also shows the up and down in Canada and U. S. overall economy by way of a graph.

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