Exogenous shocks can be split into two main groups Demand side shocks these are shocks affecting

g the rate of growth of demand Supply-side shocks these are shocks affecting costs and prices in different countries Possible demand-side shocks might include: A capital investment boom e.g. a construction boom or rapid growth of spending on ICT A pre-election government spending spree (e.g. the government opting for a fiscal policy expansion before an election) A sudden and significant rise or fall in the exchange rate affecting net export demand and having follow-on effects on output, employment, incomes and profits of businesses linked to export industries A change in the rate of economic growth in one or more of the countries of our major trade partners which affects the demand for our exports of goods and services An unexpected cut or an unexpected rise in interest rates (i.e. a monetary policy shock) Changes in aggregate demand brought about by a demand-side shock will then translate into changes in the short term rate of growth as measured by the annual change in real GDP. This can create disequilibrium in the economy which takes growth, prices and incomes away from their projected levels. The ripple effects of an external shock can take some time to work their way through the circular flow of income and spending. The government and/or the central bank may decide to make policy changes in order to absorb the shock effects. For example their might tighten monetary policy if demand is expected to rise too quickly; or they might inject some liquidity /spending power into the economy if a negative demand shock raises the risk of a deflationary recession. Supply-side shocks to the economy There are many possible supply-side shocks to the global economy. Some of them prove to have long-term beneficial effects, for example the emergence, adoption and take-up of a new production technology arising from invention and innovation that has the effect of reducing cost for producers and prices for consumers. Often it takes several years for the full impact of such supply-side shocks to become apparent and for their full significance to be recognised. FACTORS: a. Economic Growth. Economic activities refer to the level of buying and selling activities happening in an economy over a time period. It is a highly complex activity and keeping accurate track of it is beyond comprehension. Economic activity is not constant and can change rapidly, thereby affecting the business. Economic activity changes could happen due to the following reasons: Changes in income levels Future prospects of individuals. Future of the economy The level of economic activity in the world as a whole Political activities around the world Natural disasters - like hurricanes, earthquakes, or flood etc Changes in prices of raw materials - oil, metals, fuel, energy and so on Changes in world stock markets The level of economic activity is usually measured by GDP (Gross Domestic product). It refers to the total amount of goods and services a country produces. Businesses are greatly influenced by the economic activities. When GDP rate falls or slows down, there will be a fall in demand for good or services offered by businesses. As a result, businesses will witness a fall in revenues and profit margins. To curb this business will have to reduce their prices to increase the sales. This

could further lead to increase in unemployment. On the other hand when there is an increase in GDP, the demand for products will automatically increase and hence the prices will go up. To cope with the increase in demand business will need to employ new people resulting in reduction in Unemployment rates. b. Inflation: With the increase in Inflation there will be an increase in the level of prices of products and services over a specific period of time. As a result the firms will have to incur higher costs of operations. This will be also due to the increase in wages of the employees. c. Interest Rates: Interest rates are the charges levied by the banks for lending a loan. Increase in Interest rates will directly influence the business as businesses borrow money from the banks from time to time. Increase in interest rates will lead to higher interest expense: Businesses will have to incur higher costs to repay the loan. Interest rate changes also affect customers who in turn will affect the business. In case of increase in interest rates the amount that individuals need to pay to borrow the money will increase thereby, reducing the demand for large products in the market. Further, if the interest rates decrease then the charges on a loan to buy larger items like cars, electrical equipments are likely to fall. As a result, a large number of people might be willing to buy such items. There will be a sudden increase in the demand for the products offered by such businesses.