Economic Recession

Economic Recession —— falling output (negative economic growth) in an

economy over a sustained period of time, usually 6 months.

% change in real GDP is negative

Economic Recession can be caused by

Supply-side causes

Causes the Decrease of Quantity and Quality

Demand-side causes

Decrease of consumer expenditure, investment, and government

spending

Supply Side Causes

fall in aggregate supply which reduces the quality or quantity of resources in an
economy
exampleS:

the depletion (using up) of natural resources eg, oil reserves

natural disasters eg earthquakes/flooding

net outflow of skilled workers from country

rising costs of production

Cause for drop in Consumption (Consumer

Expenditure)
High interest rates → save more

fall in real wages → people earn less

Inflation (peak) → people wait till prices are lower/ people can’t afford

Decreased consumer confidence → increase saving less spending

Economic Recession 1
 rise in taxes → cost of living is higher → less disposable income

manufacturers cut back in reaction to falling orders → unemployment rises

High unemployment → lower consumer incomes

Causes for drop in Producer Investment

consumers change demand → decrease in consumer expenditure →
producers use less resources

Reduction in government spending and subsidies → costs will be higher than

profits

fall in business confidence so less investment

lack of resources → increase in cost of resources and production → less

profits → less production

rise in minimum wage → increase in cost

lower business confidence

higher interest rate → high cost of borrowing → decrease borrowing

Causes for drop in Government spending

less income → government less tax → less spending on services

high interest rates → less borrowing and spending

government wishes to save resources → decreases in spending

increased tax → people less inclined to spend → less disposable income

government corruption → cutting spending for government officials’ self gain

and benefit

more welfare payments need to be made (allocate more resources to welfare

payments)

loss leading to lower incomes and lower consumer spending

Economic Recession 2
 Causes for drop in net exports (decrease X, increase
M)
recession in the economies of trading partners →decrease demand for
exports

increase in value of domestic currency → increasing relative price of exports

→ decrease in quantity demanded of exports

imposition of trade barriers by another country on exports → exports more

expensive in overseas markets

removal of tariffs on imports → imported goods cheaper → increased

spending on imports

Economic Recession 3