Before, understanding ´Recessionµ, 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

B] TWO FACTORS OF MARKET; - 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; Usually, we think; Demand = Quantity But, here Demand = Price; This is because, Price decides the Quantity of Sales; Competitive Price = More Demand; In competitive Price = Less Demand;

Producer Price Consumer 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 ² M)} C = Consumables, I = Gross Investments, G = Government Spending, X = Exports, M = Imports

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

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

C] What is Recession?
There is a joke that economists quote to explain the Difference between ´Recession & Depressionµ

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:+(1<2851(,*+%25/26(6+,6-2%

'(35(66,21 
:+(1<28/26(<285-2%

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D] What is a Business Cycle?

What goes up; Has to come down;

Growing economy has to come down if the production rate of goods & services was more than the actual consumption;

E] Why Recession happens?

E1] OVER PRODUCTION

E2] LOW CONFIDENCE LEVEL

E] Why Recession happens?

E1] OVER PRODUCTION
PSEUDO DEMAND ACTUAL NEED WAS NOT THERE; WRONG PROJECTIONS

A situation in which the supply exceeds the nation·s ability to consume what has been produced; Supply > Demand

COMPANIES PRODUCED MORE

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

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

E] Why Recession happens? E2.2] Assignable Cause

Bad Incidences Happening; Example: September 11 Terrorist Attack in US; International Airport block in Thailand; Mumbai Attacked in India; etc« Series of such incidences leading into a kind of War Please see next slides, for details on business impact;

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, to attract people But, still, no improvement in occupancy rate Airline & Hotel Industries started ´Cost Reductionµ activities
CONTINUED IN NEXT SLIDE

Terrorists· Attack on 11th September in US
Airline & Hotel Industries started ´Cost Reductionµ activities

i] Reduce No. 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 peopleµ 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, lays off people

So, you can see how the hit on Airline and Hotel industries can affect ´Un-relatedµ industries in the end;

One industry can hit many other industries when the confidence level of millions of consumers & producers drastically comes down;

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F] How to know recession? Indicators to say a nation is in recession;

- People buying less stuff - Decrease in factory production - Growing unemployment - Slump in personal income - An unhealthy stock market

G] How to come out of recession?
It is unhealthy for any nation to be in Recession; So, Government will take certain countermeasures to eliminate or reduce the Effect of recession for turnaround;
Important Point: Today, it is a market Economy

Producers;
Can produce and sell at their prices

Consumers;
Can decide to buy or not;

Both Producers and Consumers are free to act; Not a forced action

G] How to come out of recession?
Hence, Government does not have direct control on Producers· & the Consumers· behavior; But, they can influence millions of Producers & Consumers with Government·s policies;

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

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

Demand picks up; 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

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. This money kept in RBI is called ´Reservesµ; RBI sets certain ratio of this reserves and it is called ´Reserve Ratioµ

Demand picks up; 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; 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 It becomes an income to Govt. to inject money into the market

2] Lower the interest rates 3] Use its own reserved money to buy Govt. bonds

Demand picks up; Market can recover;

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

Nation·s recession is controlled by the actions of everybody living in that country;

I] WOW!!!!!!!!
Most of the developing Economies like China, India; Currently, Slow Down Stage; Not yet in Recession GDP Growth Rate Down; But, Still expected to be Around 6% in India

Most of the developed Economies like US, Japan, Germany, etc

Currently, in Recession

GDP Growth Rate Negative;

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