Friday, March 6, 2009

What we understand by recession?

We all know that our world economy is in recession, but do we really know what recession mean? and how it is counted. I'll try to define recession in the way what I understood.

In economics, recession is described as decline of country's gross domestic product for at least two months. Experts and professionals also believe so. But in my point of view the root of recession starts from previous quarters than just last two quarter’s decline. Let go through the economic cycle and check how economic conditions changes like weather.

The Economic Cycle:

When the economic growth is positive, number of employment is maximum and and almost all are making money. Since we are making money we tend to spend it, so demand for goods such as food, vehicle, electronic products are larger. At a point of time demand gets so high that supply can not keep up.

Now this high demand cause a rise in prices of goods. With the prices, salary's need to rise to keep up with the high prices of goods. Rise in salary causes companies to rise most of the items price. When the price of most item get high, consumers either stop buying or slow down considering the prices of goods are too high. The demand gets decreased and companies start cost cutting which leads to decrease the number of workers as they don't need to produce as much goods as before.

With decreasing demand the prices also get decreased which push the economy in recession.

Again companies will come up with various offers and low prices to increase their sale. Due to which demand goes up and the economic cycle goes on.

Graph of recession & the economy over time

In Unites States the official in charge of declaring recession is NBER (National Bureau of Economic Research). Definition of recession as per NBER is “significant decline in economic activity lasting more than a few months.

Check my latest finance post here.

1 comment:

Bendz said...

Good information with neat picture.
Nice graph.
Cool blog and Keep it up.
Insurance Agent