Causes And Impact Of A Recession

What is a Recession?

Recession is a massive decline in economic activities. When the spending capacity falls, recession takes place. Recession hinders the growth of the economy. It affects the economic indicators such as GDP, employment, income. All these indicators experience a fall due to recession.
Simple concept of recession: When unemployment rate increases, purchasing power of the consumers falls. Due to less demand, market declines and businesses can face bankruptcy. Eventually, the overall economic growth is severely affected, which results in fall in GDP.

How does a Recession affect the Economic Indicators?

Recession has a negative effect on the economic indicators like income, employment, GDP.
Recession causes fall in the employment rate. Since, people have lost their jobs, there is no source of income.
GDP is the most important indicator. Real GDP measures the total value generated in a given time. When GDP becomes negative, productivity falls.
When real income of the consumers fall, so does the demand for goods and services.
Employment and real income are interlinked. Negative employment breeds negative income.
Lack of demand in the market forces the businesses to produce less, causing fall in overall industrial production and manufacturing of goods.
Sharp decline in the consumer spending is seen. The economic growth becomes negative and GDP of the country drastically falls and becomes negative.

Causes of a Recession

1.Rise in Interest Rates

Interest rates determine the investment strategies. The relationship between interest rate is negative. When interest rate falls, it encourages to invest more. But in case of recession, it is the opposite. Interest rates are higher during recession which leads to less investment.

2. Lower Confidence

Fall in employment opportunities compels consumers to restrict themselves from buying. This way the businesses face financial constraints caused by slow sales and have to cut back on the employees they have. Manufacturing of goods lowers. The confidence of consumers and sellers has lost.

3. Slow Production and Manufacturing

Decline in manufacturing orders reduces the production of goods and services. Less manufacturing orders is one of the causes of recession.

4. Deflation

Economy is slowed down due to falling prices. Reduction in the value of goods and services gives rise to high consumer expectation of lower prices which declines the present demand. Recession takes on the market as the demand falls.

5. Decline in Asset Prices

When prices of assets like gold, property falls, the overall wealth falls. Negative wealth leads fall in the spending capacity of the consumer

Impact of a Recession

  1. Unemployment

Unemployment rate rises because when firms go bankrupt they will have to lay off the existing workers in order to reduce production cost and will higher limited workers. Rise in unemployment rate will have an impact on the income of the workers. Income of the consumers will decrease due unemployment.

2. Lower Wages

Salary of the workers will be affected due to recession. To keep lower cost of production, firms will reduce the salary of their employees. Workers will have to accept lower salaries due to rising unemployment.

3. Fall in Asset Prices

Falling prices of properties or lands will hamper the wealth of the consumer. Negative wealth will affect consumer’s confidence and this will cause less spending.

4. Rise in Government Spending

Government spending will have to be increased due to unemployment and lower incomes. Financial help will have to be given to the consumers. Expansionary fiscal policies will be implemented by the government in order to stabilize economic activities.

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