What are Real Shocks?

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- [Narrator] What are real shocks?

Droughts, changes to the oil supply,

hurricanes, wars,
and technological changes

are all examples of both positive
and negative real shocks

that can have big and potentially
far-reaching consequences

on the economy.

Let's take a look
at the U.S. economy.

The U.S. economy grows at about
3 percent per year on average.

But it does tend
to fluctuate quite a bit.

If you've ever wondered why that is,
well, one cause is real shocks,

which can affect
the fundamental factors of production.

For instance, the supply
of oil might leap up, or leap down.

The weather can be an important
positive or negative shock as well,

especially
in agricultural economies.

We call shocks like this real shocks
because they directly affect

how the factors of production
are transformed into output.

Even in developed economies,

a bad hurricane,
like Hurricane Sandy --

that can slow growth
for a quarter or two.

It's hard to run a factory,

for example, when the factory
has been flooded.

Even factories far from the center
of the hurricane --

they may have to slow down
if they can't get parts, for example.

Wars, or big changes in taxes
or regulations,

or other government policies,
can also shock the economy

as can changes in ideas
or technology.

Real shocks in one area
of the economy can also be

amplified and transmitted
to other areas of the economy.

A shock to the banking sector,
for example, can be amplified

and transmitted to other sectors.

And if the shocks are big enough --
yes, recessions,

and even depression,
can be the result.

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To learn about how real shocks
contributed to the Great Depression,

click here.

Or, test your knowledge
on real shocks here.

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