Stagnation (Economics) - Explained
What is Stagnation?
Written by Jason Gordon
Updated at March 28th, 2023
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What is Stagnation?
Stagnation is a term that can be used to describe an economy that has little or no growth. It is a state in which an economy experiences little activities and its development or growth is thereby truncated. A stagnant economy is not a moving economy, in this type of economy, the level of unemployment is on the rise and industries record smaller sales.
Back to:ECONOMIC ANALYSIS & MONETARY POLICY
How does Stagnation Work?
Stagnation does not only affect an economy, but industries or individuals can also experience stagnation. For instance, stagnation in an industry can mean reduces sales growth, an increase in involuntary and part-time labor by employees and others. Stagnation in an economy affects the totality of a country, which is why in many countries, the Central banks or Federal Reserves use certain monetary policies to control stagnation. The effects of stagnation include a decrease in economic output, a rise in unemployment, reduced job growth, lack of increase in wage for labor, a decline in sales and outputs, among others.
Situations Where Stagnation Arises
In many cases, stagnation occur for natural reasons while on other cases, stagnation is a result of unfavorable events. For instance, if an economy experiences stagnation due to certain patterns in the economic cycle, this does not require panic because the economy will be stable since the stagnation is natural. In business also, certain business activities or normal operations of a business can cause stagnation. Economies and businesses recover from natural stagnation is a short time unlike stagnation caused by unnatural causes. Some economists posit that when a stable economy can be in a stationary state of stagnation because when stagnation affects such an economy, it tends to be permanent unlike a developed economy that experiences secular stagnation Emerging economies otherwise called underdeveloped economies can be under the siege of stagnation due to their inability to adopt initiatives that will make them grow or develop. Both internal and external factors in an economy lead to stagnation, trends in an economic cycle, war, turbulence, natural disasters, famine are some of the causes. Not all static states qualify as stagnation, in some cases, an economy can be in a condition in which rising or falling form ts present economic state is not attainable, this is called static equilibrium. Economists, however, maintain that static equilibrium has negative consequences on an economy to the extent that it can become a long-term stagnation in the long run.
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