February 3, 2009

What is Recession?

Filed under: Depression, Recession — hrcases @ 4:31 pm

A recession begins when there are several quarters of slowing but still positive growth. Experts believe that it is only an “official economic recession” – when the GDP growth is negative for two consecutive quarters or more.

The official agency in charge of declaring that the economy is in a state of recession is the National Bureau of Economic Research. NBER’s defines recession as a “significant decline in economic activity lasting more than a few months”.

A lot of countries at times experience mild economic recessions. This is a built-in factor of societies economic cycle as spending and consumption are going to increase and decrease along with prices.
Experiencing many of these factors simultaneously can evoke deep economic recession or depression.

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 Federal Reserve loses balance in this equation, the economy is forced to correct itself. 

Inflation refers to a general rise in the prices of goods and services over a period of time. The higher the rate of inflation, the smaller the percentage of goods and services that can be purchased with the same amount of money. The reasons can be as varied as increased production costs, higher energy costs and national debt. 

In such a scenario, people tend to cut out leisure spending, reduce overall spending and begin to save more thereby causing the GDP to decline. Unemployment rates rise because companies lay off workers to cut costs. 

Recession can be caused by factors that stunt short term growth in the economy, such as spiking oil prices or war.

An economic recession can usually be spotted before it happens. While the growth in GDP will still be present, one can 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.


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