Tighten Your Belts - What Causes an Economic Recession?
Broadly defined, an economic recession happens in a country when the country's gross domestic product or output is going through negative 250-300growth for at least two consecutive quarters, or six months. The National Bureau of Economic Research defines it as "a significant decline in economic activity lasting more that a few months".
Usually, an economic recession lasts around 11 months, but it may last for as long as two years. A short-live recession is called an "economic correction", while an on-going recession will turn into a depression.
Causes of an Economic Recession
There are simple and complex reasons for why a recession can happen. Some elements that contribute are confidence
uncertainty
pessimism
An example where these elements take over occurs when consumers lose interest in products an outputs. When a recession is about to occur, there will be overproduction, and supply will exceed the demand for products. This will force the companies to increase prices, which will then cause a loss in confidence in the consumers who will be uncertain in purchasing products. In the end, consumers will stop buying products altogether. Psychological effects, such as what happen on 9/11, will also impact on consumer confidence.
Some economists will argue that recession may not only be caused by traumatic events such as 9/11. Events that hurt certain companies or industries can also cause recession. When major innovations occur or there is a change in the price of major components (ie price of gold, iron, steel, etc) that are crucial to production can have a major effect on some companies. The result may mean a huge reduction in their workforce.
Overconsumption
To avoid economic recession, government economic policies can be implemented. However, failure to implement these policies can be disastrous! To control spending, inflation has to kick in and will increase.
Another error in policy is that the policymakers250-421 themselves are not paying attention to see the increase in inflation and the onset of inflation. They only see the onset of inflation as merely a slowdown in economic growth and it will correct itself. While this may be true in some cases, failure to address it may lead to more economic disaster.
Economic recession is not just restricted to the US. The UN expressed concern that there may be a global recession in January 2008. To further their point, they noted that economic growth in 2006 was 3.9%, in 2007 it was 3.7%, and 2008 was forecasted to be only 3.4%. Needless to say, they were right about a slowing of the world economy! The bursting of the housing bubble in the US as well as the global credit crisis in other countries were big contributors to the global recession.
In the end, it must be understoodASC-097 that economic recession is a normal part of the economic cycle and can be brought about by external as well as internal economic shocks. There are steps that can be taken to avoid this altogether, such as raising interest rates to curb spending. However, once a country is in recession, the most difficult part is the recovery from the on-going impacts of the recession and economic turmoil.
Usually, an economic recession lasts around 11 months, but it may last for as long as two years. A short-live recession is called an "economic correction", while an on-going recession will turn into a depression.
Causes of an Economic Recession
There are simple and complex reasons for why a recession can happen. Some elements that contribute are confidence
uncertainty
pessimism
An example where these elements take over occurs when consumers lose interest in products an outputs. When a recession is about to occur, there will be overproduction, and supply will exceed the demand for products. This will force the companies to increase prices, which will then cause a loss in confidence in the consumers who will be uncertain in purchasing products. In the end, consumers will stop buying products altogether. Psychological effects, such as what happen on 9/11, will also impact on consumer confidence.
Some economists will argue that recession may not only be caused by traumatic events such as 9/11. Events that hurt certain companies or industries can also cause recession. When major innovations occur or there is a change in the price of major components (ie price of gold, iron, steel, etc) that are crucial to production can have a major effect on some companies. The result may mean a huge reduction in their workforce.
Overconsumption
To avoid economic recession, government economic policies can be implemented. However, failure to implement these policies can be disastrous! To control spending, inflation has to kick in and will increase.
Another error in policy is that the policymakers250-421 themselves are not paying attention to see the increase in inflation and the onset of inflation. They only see the onset of inflation as merely a slowdown in economic growth and it will correct itself. While this may be true in some cases, failure to address it may lead to more economic disaster.
Economic recession is not just restricted to the US. The UN expressed concern that there may be a global recession in January 2008. To further their point, they noted that economic growth in 2006 was 3.9%, in 2007 it was 3.7%, and 2008 was forecasted to be only 3.4%. Needless to say, they were right about a slowing of the world economy! The bursting of the housing bubble in the US as well as the global credit crisis in other countries were big contributors to the global recession.
In the end, it must be understoodASC-097 that economic recession is a normal part of the economic cycle and can be brought about by external as well as internal economic shocks. There are steps that can be taken to avoid this altogether, such as raising interest rates to curb spending. However, once a country is in recession, the most difficult part is the recovery from the on-going impacts of the recession and economic turmoil.
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