Do you remember the financial crisis of 2007? It caused global economic chaos and an extended period of an economic slowdown. Well, that phase in the global economy was a phase of recession. So what is a recession and what causes it? Let us learn more about it.
What is a Recession?
Recession is an economic term that describes a period of economic decline in a country. It is a temporary phase where we will see a decline in trade, industrial activity, employment, etc. Generally, when the GDP (gross domestic product) of a country sees a decline for at least two consecutive financial quarters we can identify this phase as a recession in the economy.
So during the period of recession, the economic performance of the entire country stagnates. Businesses across the country will suffer the effects of the recession. The government too will be helpless to an extent. Take for example the global recession of 2007-2008. It started due to the housing market fiasco in the USA, but the global economy suffered and its adverse effects were seen in India as well.
Browse more Topics under Money And Money Market
- Introduction to Money
- Measures of Money Supply in India
- Monetary Standards
- Money Market
- Security Related to Money Market
- Classification of Inflation
- Measures to Check Inflation
- Effects of Inflation in Indian Economy
Causes of a Recession
There are many theories as to what may cause an economy to go into an economic slowdown. Some factors have been identified that may cause an economic slowdown in a country that ultimately results in a recession. Let us take a look at some such factors.
1] High Bank Rates: When the rate of interest is very high, there is not much liquidity in the market. So the levels of investment will fall, causing an economic slowdown. We saw this in 1980 in the USA, when the rates were raised to battle stagflation. But instead, this resulted in a recession.
2] Stock Market: In a bear market, investors will pull money out of the stock market. This will drain capital out of the businesses and cause an economic slowdown. Crashes in the stock market are very harmful to the economy.
3] Housing Crisis: When the prices of houses fall the owners start losing equity. They can not pay their mortgages or take second mortgages on their homes. This may lead to foreclosure. This was the cause of the Great Recession of 2007.
4] Economic Scandals and Frauds: Sometimes banks, large corporations, and even government institutions employ questionable practices and illegal activities to boost profitability. When such schemes and scandals are exposed, the entire economy suffers. Take for example the current financial scandal of Sahara.
5] Effects of War: We generally see an economic slowdown after a war. It is the general after-effect of the stress a war causes on an economy.
6] Deflation: Deflation is the opposite of inflation. Here we will see a general decrease in the prices of commodities and services. This encourages the consumer to wait until the prices to reduce further. This can cause a recession in the economy.
7] Falling Wages: When the wages and salaries of workers do not increase with the same level as the inflation in the economy, the purchasing power of the public will reduce. He will not be able to afford the same goods and services that he use to. This can cause an economic slowdown.
Solved Question on Recession
Q: Consumer confidence is not a factor in the recession of an economy. True or False.
Ans: This statement is False. Consumer confidence is a definite factor. If a consumer believes that the economy is in downturn he will spend less money and invest less money as well. This will have an adverse impact on the economy.