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Recession 1

Recession 1

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Published by Sonu Avinash Singh

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Published by: Sonu Avinash Singh on Aug 13, 2012
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08/13/2012

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Before, understanding “Recession”, we need to understand the market economy;
A] TWO STAGES OF MARKET ECONOMY

B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

A] TWO STAGES OF MARKET ECONOMY A1] Growing Market Economy A2] Declining Market Economy .

A1] Growing Market Economy Starting Point = Willingness to buy .

A2] Declining Market Economy Starting Point = Unwillingness to buy .

Demand = Quantity But.DEMAND & SUPPLY Producer wants his demand always to be high Consumer wants his buying cost always to be low Actually. Demand is the price at which consumer is ready to buy and producer is ready to sell. In competitive Price = Less Demand. Competitive Price = More Demand. Usually. Producer Price Consumer Price .B] TWO FACTORS OF MARKET. . we think. here Demand = Price. Price decides the Quantity of Sales. This is because.

X = Exports. M = Imports . I = Gross Investments. G = Government Spending.C] What is Recession? Recession is the economy shrinking for two consecutive quarters (=6 months) with a decrease in the GDP (=Gross Domestic Product) GDP = Value of all the reported goods and services produced by the people operating in the country GDP = MONEY VALUE OF {C + I + G + (X – M)} C = Consumables.

. Other indicators could be. If GDP is growing. then market is growing due to increased demand. -Unemployment Rate -Consumption Rate -Actual Personal Income -Etc. .C] What is Recession? GDP is a good indicator of economy.

Note: If the recession continues for next quarter.C] What is Recession? GDP is a good indicator of economy. then market is growing due to increased demand. Other indicators could be.. -Unemployment Rate -Consumption Rate -Actual Personal Income -Etc. If GDP is growing. (>6 months) then we go through “DEPRESSION” Economy. .

C] What is Recession? There is a joke that economists quote to explain the Difference between “Recession & Depression” RECESSION = WHEN YOUR NEIGHBOR LOSES HIS JOB DEPRESSION = WHEN YOU LOSE YOUR JOB .

Has to come down. Growing economy has to come down if the production rate of goods & services was more than the actual consumption. .D] What is a Business Cycle? What goes up.

E] Why Recession happens? E1] OVER PRODUCTION E2] LOW CONFIDENCE LEVEL .

WRONG PROJECTIONS COMPANIES PRODUCED MORE A situation in which the supply exceeds the nation’s ability to consume what has been produced.E] Why Recession happens? E1] OVER PRODUCTION PSEUDO DEMAND ACTUAL NEED WAS NOT THERE. Supply > Demand .

2] Assignable Cause E2.1] Word of mouth Low Confidence Level of Millions of consumers and producers after they hear many job cuts. Consumers start saving money instead of spending money.E] Why Recession happens? E2] LOW CONFIDENCE LEVEL E2. they have less confidence to spend money and buy goods.1] Word of mouth E2. So. Demand coming down. Companies’ bankruptcy. etc Consumers are fearing that they may lose their jobs. This is a downward spiral in the economy. . This will result in reduction in demand in the market.

etc Consumers are not stock materials. Companies’ bankruptcy. worried about goods. Consumers start saving money instead of spending money. they Producers do fearing that they may lose their jobs. This is a downward spiral in the economy. etc… in demand in the market. So. they have less the reduce their productions. .1] Word of mouth E2. Demand coming down. This will result in reduction the profitability.2] Assignable Cause E2.1] Word of mouth Low Confidence Level of Millions of consumers and producers after they hear many job cuts.E] Why Recession happens? E2] LOW CONFIDENCE LEVEL E2. gets into confidence to spend money and buy cost reduction activities.

for details on business impact.2] Assignable Cause Bad Incidences Happening. . International Airport block in Thailand. etc… Series of such incidences leading into a kind of War Please see next slides.E] Why Recession happens? E2. Example: September 11 Terrorist Attack in US. Mumbai Attacked in India.

to attract people But. no improvement in occupancy rate Airline & Hotel Industries started “Cost Reduction” activities CONTINUED IN NEXT SLIDE .Terrorists’ Attack on 11th September in US Created fear in people People cancelled their travel plans Resulted in low occupancy rates Airlines & Hotel Industries badly hit Airline & Hotel Industries offered discounts. still. gift coupons.

lays off people . of flights ii] Lay off people Low or No income to spend and buy goods Demand for other goods come down iii] Salary reduction to “Not laid off people” They became careful due to the fear of loss of job Started saving money instead of spending Demand for other goods come down In flight meals reduced Meals supplying company got the hit Catering company now.Terrorists’ Attack on 11th September in US Airline & Hotel Industries started “Cost Reduction” activities i] Reduce No.

. you can see how the hit on Airline and Hotel industries can affect “Un-related” industries in the end.So. One industry can hit many other industries when the confidence level of millions of consumers & producers drastically comes down.

.People buying less stuff .F] How to know recession? Indicators to say a nation is in recession.Decrease in factory production .An unhealthy stock market .Growing unemployment .Slump in personal income .

Both Producers and Consumers are free to act. So. Can decide to buy or not. Government will take certain countermeasures to eliminate or reduce the Effect of recession for turnaround. Can produce and sell at their prices Consumers. Important Point: Today.G] How to come out of recession? It is unhealthy for any nation to be in Recession. it is a market Economy Producers. Not a forced action .

But.G] How to come out of recession? Hence. they can influence millions of Producers & Consumers with Government’s policies. Government does not have direct control on Producers’ & the Consumers’ behavior. Government has 2 plans Fiscal Policies (By Govt.) Monetary Policies (By RBI) Government influences the economy by changing how it (Government) spends and collects money RBI manipulates the available supply of money in the country .

Market can recover. Unemployment Insurance Some income to unemployed people to spend . to create jobs Government influences the economy by changing how it (Government) spends and collects money More money available for spending Individuals get salary and spend money Demand picks up. 3] Automatic fiscal policy.G] How to come out of recession? Fiscal Policies 1] Tax cuts for businesses or for individuals 2] More Spending by Govt.

. RBI sets certain ratio of this reserves and it is called “Reserve Ratio” Demand picks up. Market can recover. This money kept in RBI is called “Reserves”.G] How to come out of recession? Monetary Policies 1] Reduce reserve ratio Government manipulates the available supply of money in the country More money available for bank to give loans What is Reserve Ratio? Each bank has to keep a high % of their assets in RBI (Reserve Bank of India). These assets do not earn any interest to banks.

Market can recover.G] How to come out of recession? Monetary Policies 1] Reduce reserve ratio 2] Lower the interest rates Government manipulates the available supply of money in the country More money available for bank to give loans Individuals take more loan Demand picks up. .

Market can recover. to inject money into the market .G] How to come out of recession? Monetary Policies 1] Reduce reserve ratio 2] Lower the interest rates Government manipulates the available supply of money in the country More money available for bank to give loans Individuals take more loan Demand picks up. 3] Use its own reserved money to buy Govt. bonds It becomes an income to Govt.

Very peculiar!!!!! But. . then. the multiplication effect is that the demand will not pickup and recession will continue. I am not misguiding you. their policies to recover from recession can be counter-productive and it may further worsen the situation. Sometimes. If we advise our people to save money. Just think from a macro level. what will happen? Nation’s recession is controlled by the actions of everybody living in that country. if everybody in the country stops spending.I] WOW!!!!!!!! RBI’s Power or Government’s Power is double-edged sword.

etc Currently.I] WOW!!!!!!!! Most of the developing Economies like China. in Recession GDP Growth Rate Negative. Germany. India. Japan. . Slow Down Stage. Still expected to be Around 6% in India Most of the developed Economies like US. Not yet in Recession GDP Growth Rate Down. But. Currently.

HOPING THIS TIME RECESSION VANISHES SOON SO THAT INDIA GETS BACK TO ITS STRONGER GDP GROWTH RATE OF 8% TO 10% (THOUGH THE EXPERSTS SAY IT WILL LAST TILL Q3 OF 2009) .

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