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 .

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

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. I = Gross Investments. M = Imports . X = Exports. G = Government Spending.

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

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

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 .

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

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

WRONG PROJECTIONS 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 COMPANIES PRODUCED MORE .

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

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

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

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. gift coupons. no improvement in occupancy rate Airline & Hotel Industries started “Cost Reduction” activities CONTINUED IN NEXT SLIDE . still. to attract people But.

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 .Growing unemployment .An unhealthy stock market .Slump in personal income .

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

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

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. Market can recover. 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.

This money kept in RBI is called “Reserves”. RBI sets certain ratio of this reserves and it is called “Reserve Ratio” Demand picks up. . Market can recover. These assets do not earn any interest to banks.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).

Market can recover. .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 Individuals take more loan 2] Lower the interest rates Demand picks up.

to inject money into the market . bonds It becomes an income to Govt. 3] Use its own reserved money to buy Govt.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 Individuals take more loan 2] Lower the interest rates Demand picks up. Market can recover.

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

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

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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