Explain the ways in which unexpected outside events can shift the long-run growth path of an economy
The idea
Trend growth normally moves slowly, driven by labour input and productivity, but shocks from outside the usual economic process can knock it onto a new path. They include policy changes (tax reform, trade liberalisation or protection), new products and technologies, geopolitical conflict, natural disasters, discoveries or depletion of natural resources, and financial crises. The key distinction is whether a shock changes the level of output once, or the growth rate itself. A technology breakthrough can lift productivity growth for years; a banking crisis can permanently lower the level of GDP and, through damaged credit supply and investment, may slow growth for a long period. The trap is treating every shock as temporary and assuming reversion to the old trend.
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