Recession: Some Important Facts
According to the definition provided by the economists, a recession is an overall slump in economic operations of a nation for a lengthy time period. It is also termed as a reduction of business cycle. At the time of a recession, numerous macroeconomic indicators differ in an identical manner. Capacity utilization, investment expenditures, production as calculated by Gross Domestic Product (GDP), jobs, corporate profits and household earnings, everything drops at the time of a recession.
Governments normally react to recessions through implementing expansionary macroeconomic strategies like raising government expenditures, raising money supply and reducing taxation.
If the Gross Domestic Product of a country goes down for minimum two quarters, it is an indication of recession. This is actually negative real economic growth. The Business Cycle Dating Committee under the National Bureau of Economic Research (NBER) is usually regarded as the authorized government agency for chronicling recessions in the United States.
The real estate market and stock market are the two worst affected sectors due to a recession.
Features of a Recession
A recession can have various aspects that can happen at the same time and consist of a gradual decrease in investment, employment as well as business profits.
If a recession goes on for an extended period of 3-4 years or there is a serious drop in the GDP (10% or more), then it is denoted as economic depression. Nevertheless, the reasons and remedies might be separate.
Recession Predictors
In spite of the fact that there are no absolutely dependable predictors, the following are considered as potential predictors:
1) Inverted yield curve. This model was formulated by economist Jonathan H. Wright. 2) Index of Leading (Economic) Indicators 3) A substantial fall in the U.S. stock market has frequently paved the way to the start of a recession.
Reasons behind Recession
Following are the important reasons behind a recession:
- Energy crisis
- Currency crisi
- Under consumption
- War
- Financial crisis
- Overproduction
- Rising fuel prices
Consequences of Recession
Following are the consequences of a recession:
- Liquidity crises
- Foreclosures
- Bankruptcies
- Disinflation or deflation
- Unemployment or job loss
The sub prime mortgage crisis and the housing market correction in the United States (an outcome of the housing bubble in the U.S.) account for the recession plaguing the country to a great extent. Other countries affected by this include Japan, Canada, the United Kingdom, China, Australia, New Zealand, India and the Euro zone.
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