How Recession Affects Economics, Individuals, Bussiness And Others?

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How Recession Affects Economics, Individuals,
Business And Others?
Recession

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In Economics, Recessions Can Be Found In Business
Cycles.
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• Business cycles are the total ups and downs of an
  entire nation or possibly the entire world from
  time to time, over a period of more than 10
  years. 

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• Recession in Economics is considered to be a
  decline in economic activity.

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• An economy operating at its potential level is
  said to be at full employment. At full
  employment, some unemployment occurs.
• This is consistent with the shifting of workers
  between jobs due to changing tastes and
  technology.

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• A recession occurs when GDP falls significantly
  below its full employment level.

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• The Department of Commerce defines a recession as
  when real GDP declines for two consecutive
  quarters.

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• Two types of recessions occur-

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• Output can fall if the economy is operating at
  below its potential (full employment) level.

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Output can fall if the economys potential
level of output falls.
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• The first type of recession occurs when output
  falls significantly below its full-employment
  level in a recession.
• Unemployment grows as a large number of workers
  cannot find work.

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• The most dramatic recession of this type was the
  Great Depression, where 25 percent of the
  workforce was unemployed and real output fell
  more than 30 percent.

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• This type of recession usually occurs when
  consumers and investors reduce their aggregate
  spending.

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2

• The second type of recession occurs when the
  economys potential output falls.
• For example, a nation that passed a minimum wage
  of 2000 will likely experience massive
  unemployment and a recession. Its potential
  output has decreased.

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• As another example, a decline in efficiency or a
  decline in technological progress could cause
  output to fall.
• Even if unemployment rises, the economy may still
  be fully employed in the sense that employers are
  fully hiring all workers they can.

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The difference between
Is CRUCIAL
Decline due to full-employment output falling
below its full-employment level.
Decline due to full-employment output falling.
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• The first type of decline fits recessions
  described by Keynesian and monetary economists,
  each giving different reasons for the decline in
  spending.

The second type fits recessions described by
rational expectations economists, who give
different reasons for the decline in
full-employment output.
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Why Recessions occur
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• Two startling facts exist about modern
  capitalistic economies.

The first is that they have recessions
The second is that most of the time they are not
in recessions.
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• This suggests that some cause occasionally
  derails the economy.

Yet, over time, the economy rebounds to full
employment.
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• But how can an economy recover?

The explanations are given below.
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Monetary Economists

• This school of classical economists observes that
  sudden and large decreases in the money supply or
  decreases in the rate of monetary growth usually
  precede recessions.

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While the economy naturally tends to be fully
employed, sudden unexpected declines in the money
supply will decrease total spending, decreasing
the economy until people and prices can adjust to
having less cash.
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Keynesian Economists

• John Maynard Keynes emphasized the importance of
  total spending and the components of total
  spending (consumption, investment, government
  spending and net exports). In particular, he felt
  that when people reduced consumption spending to
  save more, financial markets in times of
  uncertainty would be unwilling to spend the new
  savings on investments.

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Keynesian Economists (Continue)
Keynesian Economists (Continue.)

• The result would be a decrease in total spending.
  Keynes also believed that prices are sticky
  resistant to changes. The mix of less spending
  and fixed prices means lower output and a
  recession. Keynesian today put a similar emphasis
  on total spending and the rigidity of prices for
  explaining the business cycles.

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