What Is a Depression Anyway - Assignment Example

1. Economy all around the globe goes through the different highs and lows of a business. This results in a change in performance and has a bearing on the way business is conducted. Economies have a business cycle which makes them either in a growth phase or a recession phase. Economies which are in a growth phase are performing excellently and have many opportunities but recession is an area of concern for all world economies. Recession is defined as a situation when the real gross domestic product (GDP) declines for two or more consecutive quarters (Recession, 2011). This is a situation where the growth rate might be positive and not negative but the GDP decreases consecutively in two quarters. Using the above definition creates doubt as economist and certain statistician doubt the validity of the definition as it ignores the following It doesn’t consider the unemployment rate which might highlight a start of a recession and only after it has happened for two quarters it is judged at inflation (Moffat, 2011) The time span is long so if a recession occurs for a period of 10 months then by the time it will be identified the recession gets over thereby it doesn’t help to identify recession clearly (Moffat, 2011) This helps to identify recession by finding out different factors like unemployment rate, industrial production, wholesale sales, retail sales, and real income. This will help to give a better idea about recession and will help to identify the time when it happens (Moffat, 2011). Recession brings a change in consumer perception and has an effect on the market demand for goods and services. When a consumer expects a recession the demand will fall which is shown in the chart graph below where the quantity demanded has fallen. The above graph shows that the fear of economic recession reduces demand for goods thereby pushing the demand curve downwards as seen from the movement from Qd1 to Qd2. This further aggravates the problem and the economy becomes more susceptible to recession as there is doubt in the minds of the consumer thereby affecting the normal growth pattern. Recession happens due to various reasons and getting out of this rap requires a lot of work to be done. Recently, the world witnessed recession due to bank failures. This led to real estate failure which wiped out consumer confidence leading to unemployment, rising inflation, poor industrial production and depleting sales. Economies that get entangled into recession find it difficult to come out of it as gaining back consumer confidence takes time. To ensure that the economy recovers banks need to be more responsible and the government needs to take step to restore back the confidence. This is a time taking process during which the government needs to ensure that steps that are taken doesn’t result in inflation as it could double hurt the economy thereby delaying the recovery process (Recession Restart, 2009). 2. The US economy looks to be in recession. It is definitely the starting of the recessionary phase for the world economy. There are many factors which highlights that the US economy is moving towards recession and has been due to the real estate failure. Some of the factors which highlights that US economy is moving towards recession are as follows The dip in GDP over two consecutive periods highlights it. The growth rate of GDP in Q4 of 2007 was 0.6% which was matched by the growth rate in Q1 of 2008 to 0.6% (Raichura, 2008). The growth rate has been consistent and has fallen when compared to the previous quarters highlights that the policies of the government is ineffective. This is further highlighted in the graph below (Discus, 2010) The above graph clearly presents that the US economy GDP has dipped for consecutive quarters which highlights fear of the economy sliding into recession. This is further aided by the following The unemployment rate has grown. This is seen by the data presented in the article which states that 200,000 people have been rendered jobless. This is a clue which highlights that the US economy is moving towards a recessionary period. This is further substantiated by a finding which shows that the around 1.6 million people have become jobless in the last year and the unemployment rate has grown by 1% (Free Exchange, 2008). This shows the future direction of the economy if quick action is not taken. This is also demonstrated in the graph below (Discus, 2010) The above graph highlights the fact that unemployment rates have grown severely. Based on past examples it can be ascertained that when economies witness rise in unemployment rates for a continuous period it results in a recession. Another indicator in the same direction is the fall in both retail and wholesale sales. This is an important indicator to identify the money in circulation. This has taken a hit and has seen a reduction far more than expected. This is shown in the graph below (Discus, 2010) The graph shows that there has been a tremendous decrease in sales. It highlights that people are aware of the chances of recession and are preparing for the future. This is causing an overall dip in industrial production as the demand curve has decreased. This highlights that the economy is loosing its pace and entering into the mode of recession. The dent in consumer confidence which stands at the lowest point also highlights the chances of a recession. It has been stated in the articles that consumer confidence is the lowest which will make it difficult for the government to regain it. This will thereby push the economy into recession and chances of recovery are bleak and will take a longer time to revive. Thus, the different tools highlights that the economy is moving towards recession. All the different measures highlights the same thereby strengthening the fact that the US economy is slowly moving towards a recessionary phase and will require the help of the government to revive back which will be a lengthy and time consuming process. 3. The commentator by stating that the official benchmark might not tell the correct state of the US economy means that figures have been concealed. This is done with the intention that the consumer confidence doesn’t get hurt. If the government doesn’t use it as a mechanism it could result in a situation where the consumer looses confidence and the recession gets converted into a depression which will take years to be corrected (Desmond, 2009). The government uses this as a mechanism to show that every thing is under control and the forecast highlighted by economics is unlikely. In the mean time the government takes the required steps to ensure that the economy is able to fight recession by giving the necessary impetus and push to the economy. This can be seen from the fact that the government highlighted a more quick recovery then actually achieved as they predicted a higher growth rate though actually it was 2% (Morgan, 2009) The government uses this mechanism just to ensure a rise in confidence. This acts as a mechanism which helps the investment level to rise. This also creates a perception in the mind of the consumers that the economy is growing which thereby instigates demand for the goods. This thereby helps to reduce the effect of recession to a certain extent and also ensures that the economy is able to revive faster. The figures released by the Fed are considered as official figures and world economies use it to plan their future actions. The government takes a stance to ensure that the figures released are conservative and doesn’t have an effect on other economies which could push the whole world into recession. Since, US has a big share in the worlds export so providing a conservative figure is a way to ensure that economies all around the world don’t get hurt. This can be seen by the fact that the US economy entering into recession also forced the developing countries like India who has dependency on US fall into the same trap (Krishnamurthy, 2008). The Fed looks towards ensuring that their steps don’t affect other economies and are of the view that the steps taken by them will ensure that recession doesn’t engulfs the globe. The official figures released by the Fed are done with the intention that before the economy gets into recession the steps taken by the government will ensure that such a situation doesn’t exist. On the backdrop of releasing a pessimist figure will ensure a rise in consumer confidence which will help the economy to grow. The mechanism could backfire as relying on the method could make the entire world get into an economic slump which was witnessed in 2008. The government on their part looks to build confidence and the official benchmark is therefore a more conservative approach used by the government to ensure that the economy doesn’t have to suffer from the loss of consumer confidence and can revive back on the trajectory of growth. 4. The commentator by signifying the term tightrope means that reducing the interest rate continuously as done by the Fed will result in inflation to rise. When interest rates falls, the cost of borrowing reduces which tends to increase capital investment and, as a result, total aggregate demand increases. (Nicholson, 2008) The decrease in interest rates makes borrowing cheap. This is shown below It shows that when interest rate fall money demanded rises. This is because borrowing becomes cheap. This results in more demand. This pushes the supply curve up. It ends when the demand matches supply. This happens but after consumption and investment has risen. Thus it results in expansion. A look at the demand and supply shows as Here we see that interest rate affects entire demand. The aggregate demand moves upwards. It is seen by demand 0 line. The supply is same. This causes output to grow as a result prices also move upward. (Nicholson, 2008) Thus, we see that the demand shifts up. Thus the above diagram shows that changes in supply and demand results in equilibrium at a point different from P0 and P1 at P2. Thus, interest rate brings an effect. The fall in interest rate affects inflation and employment. A decrease in rate causes “more unemployment as companies reduce their production because people consume less”. (Nicholson, 2008) This also has an effect on inflation. This is an area of concern for the Fed as reducing the rates continuously will result in more money chasing few goods. Inflation is the change in the price of commodities compared to the base price. Inflation is calculated over a bouquet of goods and an economy is said to be in inflation when the rise in general rise in price of goods. Here the value of the currency falls as fewer goods are purchased at the same price. (Boyes & Melvin, 2008) This results in inflationary conditions as highlighted by the commentator. The government while looking to take steps to reduce the impact of recession ensures that the funds are easily available for investment and at cheap rates. This is done with the intention to ensure that industrial production grows. Since, at that point the consumer confidence is low so reducing the rates results in more money and liquidity in the system. The production remains the same as investment houses fear the effects of recession. This results in fewer goods and more unemployment. This thereby creates a situation where inflation starts to rise. This is a precarious situation which a government has to face. The government while looking to reduce the impact of recession gives rise to inflation. This makes it difficult for the government as inflation in an economic recession could push back the economy and dent consumer confidence to a large extent. This will further make it difficult for the economy to revive. Thus, inflation is the condition that the commentator is stating by tight rope. This makes it important that the government uses the correct steps to ensure that recession is taken care of at the same time inflation doesn’t hinder the progress. References Boyes, W. & Melvin, M. 2008. “Macro economics”, 7th edition, Houghton Mifflin Company Discus. 2010. When is a double dip recession really a depression? Retrieved on April 15, 2011 from http://expectedreturnsblog.com/when-is-a-double-dip-recession-really-a-depression/ Desmond, M. 2009. What is a depression anyway? Retrieved on April 15, 2011 from http://www.forbes.com/2009/01/14/economy-recession-depression-biz-wall-cx_md_0114depression.html Free Exchange. 2008. When is a recession not a recession? Retrieved on April 15, 2011 from http://www.economist.com/blogs/freeexchange/2008/08/when_is_a_recession_not_a_rece Krishnamurthy, B. 2008. Impact of possible US recession on India. Retrieved on April 15, 2011 from http://blogs.hbr.org/cs/2008/01/impact_of_a_possible_us_recess.html Moffat, M. 2011. Recession? Depression? What the difference? Retrieved on April 15, 2011 from http://economics.about.com/cs/businesscycles/a/depressions.htm Morgan, S. 2009. America’s vulnerable half speed recovery. Retrieved on April 15, 2011 from http://articles.moneycentral.msn.com/Investing/Extra/americas-vulnerable-half-speed-recovery.aspx Nicholson, J. 2008. “Interest rate affect on aggregate demand”, Tata McGraw Hill Recession. 2011. Exactly how bad is it? Retrieved on April 15, 2011 from http://www.newsweek.com/2008/10/15/exactly-how-bad-is-it.html Raichura, K. 2008. US annualized growth rate: so when is there a recession? Retrieved on April 15, 2011 from http://gavekal.com/dforum/default.aspx?f=2&m=2941 Recession Restart. 2009. What happens to an economy during recession? Retrieved on April 15, 2011 from http://recessionrestart.com/what-happens-to-the-economy-during-a-recession/ Read More