 What is a Recession?
In economics, the term recession is generally used to describe a situation
in which a country's GDP, or gross domestic product, sustains a negative
growth factor for at least 2 consecutive quarters. I say generally because
recession can be defined differently by different economists. Just as there is
an agency to define the measure of inflation; the official agency in charge of
declaring that the economy is in a state of recession is the National Bureau
of Economic Research (NBER). NBER's definition of recession is a bit more
vague than the standard one that was described above; they define recession as
a "significant decline in economic activity lasting more than a few months".
For this reason, the official designation of recession may not come until
after we are in a recession for six months or even longer. Some economists
also suggest that a recession occurs when the natural growth rate in GDP is
less than the average of 2%. Typically, a normal economic recession lasts for
approximately 1 year.
As a part of a normal business lifecycle when an economy that grows over a
period of time tends to slow down. An economy typically grows for 6 to 10
years and later is likely to go into a recession for about 6 months to 2
years. Thus, economic recession is a declining phase of the business life
cycle when there decline in economic activities spread across the economy,
lasting for more than a couple of months, normally visible in GDP, employment,
real income, industrial production and wholesale or retail sales.
A prolonged or severe recession is referred to as an economic depression.
Although the difference between a recession and a depression is not clearly
stated, it is often believed that a decline in Gross Domestic Product or GDP
of more than 10% constitutes a depression.
US markets have a great impact on the global economic growth. Therefore
when there is a cue of probable recession in the US it apparently affects the
Indian market as well as the global markets leading to a global economic
slowdown. Thus weakening of the US economy is bad news, not only for India,
but also for the rest of the world.
Causes of Economic Recession
This is another staunchly debated topic; but the general consensus is that
a recession is primarily caused by the actions taken to control the money
supply in the economy. The Federal Reserve is responsible for maintaining an
ideal balance between money supply, interest rates, and inflation. When the
Fed loses balance in this equation, the economy can spiral out of control,
forcing it to correct itself. This is precisely what we have seen in 2007,
where the Feds monetary policy of injecting tremendous amounts of money supply
into the money market has kept interest rates lower while inflation continues
to rise. This, coupled with relaxed policies in lending practices making it
easy to borrow money; the economic activity became unsustainable resulting in
the economy coming to a near halt. It is also said that recession can be
caused by factors that stunt short term growth in the economy, such as spiking
oil prices or war. However, these are mostly short term in nature and tend to
correct themselves in a quicker manner than the full blown recessions that
have occurred in the past.
Effects of a Recession
An economic recession can usually be spotted before it happens. There is a
tendency to see the economic landscape changing in quarters preceding the
actual onset. While the growth in GDP will still be present, it will show
signs of sputtering and you will see higher levels of unemployment, decline in
housing prices, decline in the stock market, and business expansion plans
being put on hold. When the economy sees extended periods of economic
recession, the economy can be referred to as being in an economic depression.
What is GDP
The gross domestic product (GDP) or gross domestic income (GDI)
is one of the
measures of national income and output for a given
country's
economy. GDP is defined as the total
market value of all
final goods and services produced within the country in a given period of
time (usually a
calendar year). It is also considered the sum of a value added at every
stage of production (the intermediate stages) of all
final goods and services produced within a country in a given period of
time, and it is given a money value.
The most common approach to measuring and understanding GDP is the expenditure
method:
GDP = consumption + gross investment + government spending + (exports
− imports),
or,
GDP = C + I + G + (X-M).
"Gross" means
depreciation of
capital stock is not subtracted. If net investment (which is gross
investment minus depreciation) is substituted for gross investment in the
equation above, then the formula for
net domestic product is obtained. Consumption and investment in this
equation are expenditure on
final goods and services. The exports-minus-imports part of the equation
(often called net exports) adjusts this by subtracting the part of this
expenditure not produced domestically (the imports), and adding back in domestic
area (the exports).
The Great Depression
The Great
Depression of 1929 was a worldwide economic depression that lasted approximately
10 years. On October 24, 1929, “Black Thursday” when 12.9 million shares of
stock were sold in one day, triple the normal amount prices fell 15 - 20%,
causing a stock market crash
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