Exogenous Shocks

Exogenous shocks refer to external factors (created outside the economic model) that profoundly affect an economy’s growth. While some factors enhance growth, others impede growth. The following is a summary of typical shocks.

Sources of Exogenous Shocks

• Policy changes: These may include fiscal and monetary policy, minimal intrusion on the private sector, encouraging competition, support for infrastructure, and sound tax policy. Some changes, such as sound fiscal policy, are pro-growth, while others, such as erecting trade barriers, may inhibit growth.
• New products and technology: Technological advancement and innovations allow workers to produce more goods and services with constant labor and capital input. Examples could include the automobile or printing press, which have a spillover effect and make other industries more productive.
• Geopolitics: Like policy changes, geopolitics refers to the political climate of a particular economy. Geopolitics often refers to international conflict and can encourage the stockpiling of weapons that divert resources from other, more productive ends. Also, military de-escalation could have the opposite effect.
• Natural disasters: This always tends to be growth-inhibiting. The only instance in which natural disasters might promote growth could be the demolition of old capital that is replaced by newer, more technologically advanced assets.
• Natural resources/critical inputs: Natural resource discovery and extraction promote growth, while their depletion diminishes growth.
• Financial crises: Occur when the public loses faith in intermediaries’ ability to funnel capital to the highest and best use. It could result in growth-inhibiting scenarios, such as a run on banks or a stock market crash. 

Question

The government of Country X is planning to privatize numerous local corporations and implement strict measures, including fines and the possibility of jail time, against intellectual property (“IP”) theft. The following measures is the government most likely to take?

1. Privatization: growth-inhibiting; IP Measures: growth-enhancing.
2. Privatization: growth-enhancing; IP Measures: growth-enhancing.
3. Privatization: growth-inhibiting; IP Measures: growth-inhibiting.

Solution

The correct answer is B.

Privatization means private-sector control rather than government-controlled corporations. It is growth-enhancing because it encourages competition. Additionally, private companies are more focused on making profits and cutting costs, contributing positively to the economy. Note that lack of political interference with private companies is growth-enhancing.

Intellectual property protection is growth-enhancing as it promotes innovation and protects the rights of creators to profit from their innovations and inventions.

A is incorrect. It suggests that privatization is growth-inhibiting, while privatization is generally viewed as improving overall economic efficiency. Official decision-makers believe it reduces the fiscal burden and the external national debt. They also expect that this process will stimulate both technical efficiency and investments to increase the pace of economic growth.

C is incorrect. It suggests that privatization and IP measures are growth-inhibiting. As mentioned earlier, privatization is generally viewed as growth-enhancing. Additionally, strict measures against intellectual property theft can also be growth-enhancing. Intellectual property protection ensures returns on innovation and incentivizes further innovation. The macro view portrays that the IP of a country forms the core of competition, economic growth, and productivity, where there is a universal consensus that the theft of IP results in raised costs, low revenues, and eroding profits. Therefore, strict measures against IP theft can help protect innovation and promote economic growth.

Reading 1: Capital Market Expectations – Part 1 (Framework and Macro Considerations)

Los 1 (c) Explain how exogenous shocks may affect economic growth trends