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Recession Essay

3920 words - 16 pages

In economics, a recession is a business cycle contraction. It is a general slowdown in economic activity.[1][2] Macroeconomic indicators such as GDP (gross domestic product), investment spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise.
Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic ...view middle of the document...

[6][7] The exact same recession definition apply for all member states of the European Union.
A recession has many attributes that can occur simultaneously and includes declines in component measures of economic activity (GDP) such as consumption, investment, government spending, and net export activity. These summary measures reflect underlying drivers such as employment levels and skills, household savings rates, corporate investment decisions, interest rates, demographics, and government policies.
Economist Richard C. Koo wrote that under ideal conditions, a country's economy should have the household sector as net savers and the corporate sector as net borrowers, with the government budget nearly balanced and net exports near zero.[8][9] When these relationships become imbalanced, recession can develop within the country or create pressure for recession in another country. Policy responses are often designed to drive the economy back towards this ideal state of balance.
A severe (GDP down by 10%) or prolonged (three or four years) recession is referred to as an economic depression, although some argue that their causes and cures can be different.[4] As an informal shorthand, economists sometimes refer to different recession shapes, such as V-shaped, U-shaped, L-shaped and W-shaped recessions.
Type of recession or shape
Main article: Recession shapes
The type and shape of recessions are distinctive. In the US, V-shaped, or short-and-sharp contractions followed by rapid and sustained recovery, occurred in 1954 and 1990–91; U-shaped (prolonged slump) in 1974–75, and W-shaped, or double-dip recessions in 1949 and 1980–82. Japan’s 1993–94 recession was U-shaped and its 8-out-of-9 quarters of contraction in 1997–99 can be described as L-shaped. Korea, Hong Kong and South-east Asia experienced U-shaped recessions in 1997–98, although Thailand’s eight consecutive quarters of decline should be termed L-shaped.[10]
Psychological aspects
Recessions have psychological and confidence aspects. For example, if companies expect economic activity to slow, they may reduce employment levels and save money rather than invest. Such expectations can create a self-reinforcing downward cycle, bringing about or worsening a recession.[11] Consumer confidence is one measure used to evaluate economic sentiment.[12] The term animal spirits has been used to describe the psychological factors underlying economic activity. Economist Robert J. Shiller wrote that the term "...refers also to the sense of trust we have in each other, our sense of fairness in economic dealings, and our sense of the extent of corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people."[13]

Balance sheet recession
The bursting of a real estate or financial asset price bubble can cause a recession. For example, economist Richard Koo wrote...

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