WHAT IS

RECESSION?
Author:
DivyaVeerabhadra
Before, understanding
“Recession”,
we need to understand the
market
economy;
TWO STAGES OF MARKET ECONOMY

TWO FACTORS OF MARKET; - DEMAND & SUPPLY

TWO STAGES OF MARKET ECONOMY

A1] Growing Market Economy

A2] Declining Market Economy

Growing Market Economy
Declining Market
Economy
 TWO FACTORS OF MARKET; - DEMAND &
SUPPLY

Producer wants his demand always to be high

Consumer wants his buying cost always to be low
Actually, Demand is the price at
which
consumer is ready to buy and
producer is ready to sell;
Usually, we think;
Demand = Quantity
But, here Demand = Price;
This is because,
Price decides the Quantity of Sales;
Producer Competitive Price = More Demand;
Price
In competitive Price = Less Demand;
Consumer Price
 What is Recession?

Recession is the economy shrinking for two

consecutive quarters (=6 months) with a
decrease in the GDP (=Gross Domestic Product)

GDP = Value of all the reported goods and services

produced by the people operating in the country

GDP = MONEY VALUE OF {C + I + G + (X – M)}

C = Consumables, I = Gross Investments, G = Government

Spending,
X = Exports, M = Imports
GDP is a good indicator of economy;
Other
indicators could be;
-Unemployment Rate
-Consumption Rate
-Actual Personal Income
-Etc..

If GDP is growing, then market is

growing due to increased demand;
GDP is a good indicator of economy;
Other
indicators could be;
-Unemployment Rate
-Consumption Rate
-Actual Personal Income
-Etc..

If GDP is growing, then market is growing due to

increased demand;

Note: If the recession continues for next quarter,

(>6 months) then we go through
“DEPRESSION” Economy;
 There is a joke that economists quote
to explain the
Difference between “Recession &
RECESSION
Depression”
= WHEN YOUR NEIGHBOR LOSES HIS JOB

DEPRESSION

= WHEN YOU LOSE YOUR JOB

 What is a Business Cycle?

What goes up; Has to come Growing economy has to

down; come down if the production
rate of goods & services was more
than the actual consumption;
 Why Recession happens?

E1] OVER E2] LOW

PRODUCTION CONFIDENCE
LEVEL
 OVER
PRODUCTION

PSEUDO DEMAND A situation in which the

supply exceeds the nation’s
ACTUAL NEED WAS
NOT THERE; ability to consume what has
WRONG PROJECTIONS been produced;

COMPANIES Supply > Demand

PRODUCED
MORE
 Why Recession happens?

E2] LOW CONFIDENCE E2.1] Word of mouth

LEVEL

E2.2] Assignable
E2.1] Word of mouth Cause
Consumers are fearing that they may
Low Confidence Level lose their jobs; So, they have less
of Millions of confidence to spend money and buy
consumers and goods; This will result in reduction
producers after they in demand in the market; Consumers
hear many job cuts, start saving money instead of spending
money; This is a downward spiral in
Demand coming down,
the economy;
Companies’ bankruptcy,
etc
 Word of mouth
LOW

CONFIDENCE
Assignable Cause
LEVEL
Word of mouth
Consumers are fearing that they may
lose their jobs; So, they have less
Low Confidence Level
confidence to spend money and buy
of Millions of
consumers and goods; This will result in reduction
producers after they in demand in the market; Consumers
hear many job cuts, start saving money instead of spending
money; This is a downward spiral in
Demand coming down,
the economy;
Companies’ bankruptcy,
etc

Producers do not stock materials, they

reduce their productions, gets into the
cost reduction activities, worried about
the profitability, etc…
Why Recession Happens?
Assignable Cause
Bad Incidences Happening;

Example: September 11 Terrorist

Attack in US;
International Airport
block in Thailand;
Mumbai Attacked in India;
etc…

Series of such incidences

leading into a kind of War
 Terrorists’ Attack on 11th
September in US
Created fear in people

People cancelled their travel plans

Resulted in low occupancy rates

Airlines & Hotel Industries badly hit

Airline & Hotel Industries offered discounts,

gift coupons, to attract people
But, still, no improvement in occupancy
rate
Airline & Hotel Industries started
“Cost Reduction” activities CONTINUED
IN NEXT SLIDE
 Airline & Hotel Industries started
“Cost Reduction” activities

iii] Salary reduction to

i] Reduce No. of flights ii] Lay off people “Not laid off people”

Low or No income to They became careful due

In flight meals reduced
spend and buy goodsto the fear of loss of job

Meals supplying company

Demand for other goods
got the hit come down Started saving money
instead of spending
Catering company now,
lays off people Demand for other goods
come down
So, you can see how the hit on Airline
and Hotel
industries can affect “Un-related”
industries
in the end;

One industry can hit many other

industries when the
confidence level of millions of
consumers & producers
drastically comes down;
 How to know recession?
Indicators to say a nation is in recession;

People buying less stuff

Decrease in factory production
Growing unemployment
Slump in personal income
An unhealthy stock market
 How to come out of recession?
It is unhealthy for any nation to be in
Recession;
So, Government will take certain
countermeasures
Important Point:
to eliminate
Today, it or reduce
is a the
market Effect of recession
Economy
for turnaround;

Producers; Consumers;
Can produce and Can decide to
sell at their prices buy or not;

roducers and Consumers are free to act; Not a forced

 Hence, Government does not have direct control on
Producers’ & the
Consumers’ behavior; But, they can influence millions of
Producers &
Consumers with Government’s policies;

Government has 2 plans

Fiscal Policies Monetary Policies

(By Govt.) (By RBI)

Government influences the RBI manipulates

economy by changing how the available supply of
it (Government) spends money in the country
and collects money
 Fiscal Government influences the economy by
changing
Policies how it (Government) spends and collects
money

1] Tax cuts for More money

businesses or available for
for individuals spending

2] More Spending Individuals get Demand picks

by Govt. to salary and spend up; Market
create jobs money can recover;
3] Automatic
Some income to
fiscal policy;
unemployed
Unemployment
people to spend
Insurance
 Government manipulates the
Monetary available supply
Policies of money in the country

1] Reduce reserve More money

ratio available for bank
to give loans

What is Reserve Ratio? Demand pick

up; Market
Each bank has to keep a high % of their assets in
RBI (Reserve Bank of India). These assets do not can recover;
earn any interest to banks. This money kept in
RBI is called “Reserves”; RBI sets certain ratio
of this reserves and it is called “Reserve Ratio”
 Monetary Government manipulates the available suppl
Policiesof money in the country

More money
1] Reduce reserve Demand picks
available for bank
ratio
to give loans up; Market
can recover;

2] Lower the Individuals take

interest rates more loan
 Monetary Government manipulates the available supp
Policiesof money in the country

1] Reduce reserve More money

ratio available for bank
to give loans

2] Lower the Demand picks

Individuals take
interest rates up; Market
more loan
can recover;
3] Use its own It becomes an
reserved income to Govt.
money to buy to inject money
Govt. bonds into the market
 WOW!!!!!!!!
RBI’s Power or Government’s Power is double-edged
sword; Sometimes, their policies to recover from recessio
can be counter-productive and it may further worsen the
situation;
If we advise our people to save money, then, the multiplication effect is that
the demand will not pickup and recession will continue; Very peculiar!!!!! Bu
am not misguiding you; Just think from a macro level, if everybody in the
country stops spending, what will happen?

Nation’s recession is controlled by the actions of

everybody living
in that country;
Most of the Currently, GDP Growth
developing Slow Down Rate Down; But,
Economies like Stage; Not yet Still expected to
China, in Recession be
India; Around 6% in
India

Most of the Currently,

developed GDP Growth
in Recession Rate Negative;
Economies like US,
Japan, Germany,
etc
 HOPING THIS TIME
RECESSION VANISHES
SOON SO THAT
INDIA GETS BACK
TO ITS STRONGER
GDP GROWTH RATE
OF 8% TO 10%
(THOUGH THE EXPERSTS
SAY IT WILL LAST TILL
Q3 OF 2009)