What is an economic crisis? Concept, Causes, Consequences and Examples

What is an economic crisis?

We explain what an economic crisis is, its characteristics and the causes of this phase. In addition, its consequences and some examples.

What is an economic crisis

An economic crisis has effects such as recession, contraction and economic depression.

By economic crisis we mean a certain phase of an economic cycle characterized by negative effects, such as recession, contraction or economic depression, which means that the flow of money begins to be scarce.

Economic crises are a frequent phenomenon in contemporary societies, especially those belonging to the so-called Third World, whose industrial and economic bases are not always very solid or depend on the market price of export raw materials, for example.

In any case, in today’s interconnected world, the global economy often experiences fluctuations and setbacks in the face of unforeseen events or regional failures that destabilize the financial system as a whole.

This can occur in different magnitudes and usually causes social, patrimonial and even political damages, since it is an important source of discomfort in the populations, especially when it is fought with unpopular thrifty measures.

Types of economic crisis

According to their triggering nature, it is possible to speak of various types of economic crisis, such as:

  • Agrarian crisis. Caused by climatic oscillations and other phenomena that affect the yield of agricultural production, reducing the amount of food produced to meet the constant demand.
  • Supply crisis. Those that are unforeseen consequences that cut the distribution chain, such as natural disasters, prolonged strikes or border closures.
  • Supply crisis. Those in which the supply of a good or service is insufficient to satisfy current demand, causing an excessive increase in the price of the same, which immediately affects the economic capacity of consumers, who must sacrifice other things to continue consuming. Energy crises are usually of this type.
  • Demand crisis. Caused by oversupply or a drop in demand, which unbalances the economic cycle and causes a drop in the replacement costs of sellers and producers.

 Characteristics of an economic crisis

Economic crises are characterized by the drawbacks of the functioning of the economic system for a prolonged period of time, negatively affecting the quality of life and other social and political areas.

In addition, they have two important characteristics: instability in the markets, which makes it difficult to predict the direction to be followed and therefore untimely, risky actions, which may well contribute even more to the crisis.

The other hand, the possible transmission of this instability from a given sector or geography (isolated) to the rest of the systems or at least to the surrounding ones (centred), if it is too prolonged over time.

Causes of an economic crisis

One cause of economic crisis may be fluctuations in prices.

Among the most common causes of economic crises are:

  • Bad economic policies. Misapplication of economic policies by governments can ignite the fuse of a local economic crisis.
  • Natural, social or political disasters. Like earthquakes, revolutions or wars, they disrupt normal economic performance and alter the type of demand that exists.
  • Fluctuations in the price of raw materials. Such is the case of oil, whose oscillations have a direct impact on consumer countries and also on producers, sometimes abruptly alternating periods of prosperity with those of recession.

Consequences of an economic crisis

The consequences of economic crises are always negative and tend to be the following:

  • Economic slowdown, contraction or depression. Depending on the severity of the crisis, the economy may slow down, regress, or plunge into the deep, then take years to recover its stability.
  • Social impact. The crisis often jeopardizes social and cultural plans, leading to adjustments and reducing the quality of life of the population.
  • Political impact. The crisis confronts it with highly unpopular rate cuts and increases, leading to protests and strikes that can politically destabilize entire countries.
  • Poverty. The crises mainly affect the weakest socioeconomically, increasing poverty and in some cases leading to misery.

Economic crisis of 1929

In the year 1929 there was a great global economic crisis which became known as the Crisis of 1929 or the Great Depression.

This one originated in the United States, product of the fall of the bonds of the stock exchange of Wall Street known as the “Crac of the 29” or the “Black Tuesday”, and that extended quickly by all the countries of the world, causing fall of the national income, the fiscal incomes, the corporate profits and the prices in general.

This resulted in a 25 per cent increase in unemployment in the United States and in some countries of 33 per cent, and a decline in international trade from 50 to 66 per cent.

Other examples of economic crisis

Examples of economic crisis abound, for example:

  • The oil crisis of the ’70s. As a result of instability in crude oil prices, the world economy was affected between 1973-74 and 1978-79.
  • The crisis in Spain in 1993. As a result of the implementation of economic measures that did not include the country’s own cycles, everything was bet on a temporary bonanza and the cycle brought with it the deficit.

The crisis of chavista Venezuela. As a result of poor economic planning for a decade and a half, the former rich country of South America has been facing, since around 2013, a growing shortage of food products and unstoppable hyperinflation.

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