"Relatively small shocks can become magnified and then become shocks you have to contend with [on a large scale]," says MIT economist Daron Acemoglu.
When large-scale economic struggles hit a region, a country, or even a continent, the explanations tend to be big in nature as well. Macroeconomists - who study large economic phenomena - often look for sweeping explanations of what has gone wrong, such as declines in productivity, consumer demand, or investor confidence, or significant changes in monetary policy. But what if large-scale economic slumps can be traced to declines in relatively narrow industrial sectors? A newly published study co-authored by an MIT economist provides evidence that economic problems may often have smaller points of origin and then spread as part of a network effect. "Relatively small shocks can become magnified and then become shocks you have to contend with [on a large scale]," says MIT economist Daron Acemoglu, one of the authors of a paper detailing the research. The findings run counter to "real business cycle theory," which became popular in the 1970s and holds that smaller, industry-specific effects tend to get swamped by larger, economy-wide trends. More precisely, Acemoglu and his colleagues have found cases where industry-specific problems lead to six-fold declines in production across the U.S. economy as a whole. For example, for every dollar of value-added growth lost in the manufacturing industries because of competition from China, six dollars of value-added growth were lost in the U.S. economy as a whole.
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