Stagnation or Stagflation

• This is a combination of unacceptably high levels of unemployment and unacceptably

high levels of inflation.

During the 1970 in the UK a major rise in the price of crude oil took place.

This meant that the cost of energy rose and therefore rendered some products

unprofitable.

National income fell and both prices and unemployment rose. Any long term major

increase in costs could have this effect.

International payments Disequilibrium

• A “fundamental disequilibrium” exists when outward payments have a continuing

tendency not to balance inward payments.

Disequilibrium may occur for various reasons.

Some may be grouped under the head of structural change (resulting from changes in

tastes, habits, institutions, technology, etc.).

A fundamental imbalance may occur if wages and other costs rise faster in relation to

productivity in one country than they do in others. Imbalance may also result when

aggregate demand runs above the supply potential of a country, forcing prices up or

raising imports.

For example, a war may have a profoundly disturbing effect on a country’s economy