The NBER officially declared the end of the economic expansion in February 2020 when the United States entered a recession in the midst of the coronavirus pandemic. Recession is a normal, albeit unpleasant, part of the business cycle. Recessions are characterized by a wave of business collapses and often bank failures, slow or negative output growth, and rising unemployment. The economic pain caused by recessions, while temporary, can have major effects that change an economy. This can happen due to structural changes in the economy, as vulnerable or obsolete businesses, industries or technologies fail and are swept away. the dramatic political reactions of the government and monetary authorities that can literally rewrite the rules for businesses; or the social and political upheavals resulting from widespread unemployment and economic hardship. A recent example of a severe economic contraction has been that caused by the COVID-19 pandemic. As a result, the Economic Cycle Dating Committee of the National Bureau of Economic Research found that for most people, a contraction in the economy is a precursor to economic hardship. As the economy plunges into contraction, unemployment is rising.
While no economic contraction lasts forever, it is difficult to estimate how long a downward trend will last before reversing. History has shown that a contraction can last for many years, as it did during the Great Depression. The definition used by economists is different. Economists use the monthly economic peaks and troughs established by the National Bureau of Economic Research (NBER) to define periods of expansion and contraction. The NBER website lists the ups and downs of economic activity, starting with the low point of December 1854. The website also defines a recession as follows: In economic contexts, the word depression is probably particularly reminiscent of a depression: the Great Depression. It was the economic crisis and period of low business activity in the United States and other countries that began roughly with the stock market crash in October 1929 and continued through most of the 1930s. Economic contraction occurs when overall economic activity declines. Aggregate measures of output such as real GDP and industrial production show a decline from the previous period. When real GDP falls for two consecutive quarters, economists call it a sign of recession. A severe recession is called depression.
Therefore, recession and depression are a worse state of contraction. The Great Depression began in 1929 and lasted until 1933, although it wasn`t until World War II, nearly a decade later, that the economy really recovered. During the Great Depression, unemployment rose to 25% and GDP fell by 30%. This was the most unprecedented economic collapse in the modern history of the United States. Some theories explain that recessions depend on financial factors. These typically focus either on the excessive expansion of credit and financial risks in good economic times before the recession, or on the contraction of money and credit at the onset of recessions, or both. Monetarism, which attributes recessions to insufficient money supply growth, is a good example of this type of theory. Austrian economic theory bridges the gap between real and monetary factors by examining the relationships between credit, interest rates, the time horizon of market participants` production and consumption plans, and the structure of relationships between certain types of productive capital goods. As mentioned earlier, a business cycle has four phases: peak, contraction, trough, and expansion. The “trend line” is simply an average of ups and downs.
A peak is the culmination of the cycle. At its peak, most of the economy`s resources are being used and entrepreneurs and consumers are optimistic about the future. It is important that the level of employment is high and that jobs are available for everyone who wants to work. At this point, it can be difficult for many companies to find a skilled workforce. A recession is a significant decline in economic activity that spans the entire economy and lasts more than a few months and is generally reflected in real GDP, real income, employment, industrial production, and wholesale and retail trade. A recession begins shortly after the economy reaches a peak of activity and ends when the economy reaches its lowest point. Between the bottom and the peak, the economy is expanding. Expansion is the normal state of the economy; Most recessions are short and rare in recent decades. Economic contractions occur regularly. These are the lows in a series of ups and downs in economic activity known as “business cycles.” See figure I below.
A moderate increase could only slow economic growth. But if interest rates rise too high, it can lead to a decline in economic growth. The word recession is often used in the context of the economy. But the word, of course, has other uses. First recorded in the mid-1600s, the recession comes from the Latin recessiō, a form of the verb recēdere, “to go back, to retreat.” Recēdere is ultimately the source of the English word recede et recess. Productivity tends to fall in the early stages of a recession, and then rises again when the weaker firms close. Differences in profitability between companies are increasing sharply. The decline in productivity could also be attributed to several macroeconomic factors, such as.B.
the productivity loss seen in the UK due to Brexit, which could lead to a mini-recession in the region. Global outbreaks such as COVID-19 could be another example, as they disrupt the global supply chain or prevent the movement of goods, services and people. Economic contractions are a serious issue, but the Federal Reserve system is still able to joke about it. The following appears on the Website of the Federal Reserve Bank of San Francisco. The worst recession Australia has ever experienced occurred in the early 1930s. Due to agricultural profit problems in the late 1920s and budget cuts, Australia experienced the greatest recession in its history in 1931-1932. It fared better than other countries that went through the depression, but its poor economies also affected Australia, which depended on it for both exports and foreign investment. The country also benefited from higher productivity in the manufacturing sector, facilitated by trade protections, which also contributed to less impact.
All economic contractions tend to have a social impact, as they are often associated with an increase in the number of employees. Of course, those who lose their jobs have no income and may not be able to afford the bare necessities. In a 2004 speech, Ben Bernanke, former chairman of the Federal Reserve, described the great economic contraction that took place during the Great Depression: an economic contraction occurs when domestic output, like GDP, declines. It leads to a decline in other areas, such as individual income, production and turnover. Unemployment rates may rise. When prices on the stock market fall, it is called a bear market. Investors often sell stocks during a bear market. When prices rise in the market, it is a bull market where investors often like to buy. The use of the bear and bull for these distinctions dates back to old proverbs and financial jargon. An economic contraction is caused by a loss of confidence that slows down demand. An event, such as a stock market correction or crash, triggers it. But the real cause precedes the high-profile event.
For example, it can be triggered by an increase in interest rates, which reduces capital expenditures. A low point marks the low point of the cycle when the negative forces of the economy have had an impact. At this point, companies will have large quantities of unsold goods that they are willing to offer at discounted prices, so the prices of consumer goods will fall. The same goes for the prices of business equipment and other assets that will trigger investment. As a result, the downward trend is broken and economic activity begins to recover. The economy then began to expand: a period of growing optimism, investment and consumer demand. Depression is a deep and lasting recession. While there were no specific criteria for reporting depression, the unique characteristics of the Great Depression included a decline in GDP of more than 10% and an unemployment rate that briefly reached 25%. Simply put, depression is a severe decline that lasts for many years. 3.
Does consumer spending increase or decrease in the event of an economic contraction? This confusion is not only due to the fact that a word like recession is often used as opposed to a word like depression. It`s also because there are no strict, comprehensive, uniform rules about when an economic recession turns into a recession – or worse. Oil prices are a factor that has a significant impact on the economy. Indeed, oil consumption occurs in almost all industries, including raw materials, energy and fuels. Oil shocks could lead to a sharp decline in economic growth and even stagflation. Most mainstream economists believe that recessions are caused by insufficient aggregate demand in the economy and prefer the use of expansionary macroeconomic policies during recessions. The preferred strategies for pulling an economy out of recession vary depending on the school of economics followed by policymakers. .