What is a Recession?
A recession is a significant decline in economic activity that lasts for more than a few months. It’s visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.
How Does a Recession Occur?
Recessions occur when there is a widespread drop in spending. This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock, or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.
The Role of Economic Indicators
Economic indicators play a crucial role in identifying the start and end of recessions. The business cycle dating committee of the National Bureau of Economic Research (NBER) is generally seen as the authority for dating US recessions. The NBER defines an economic recession as: “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
Effects of a Recession
A recession has wide-ranging effects on the economy and the society. It leads to a decrease in consumer and business spending, increase in unemployment, and a possible drop in inflation. The severity of these effects depends on the length and magnitude of the recession.
Recession vs Depression
While both recession and depression indicate a slowdown in economic activity, they differ in terms of duration and severity. A recession is typically shorter and less severe. On the other hand, a depression is an extended period of economic decline with a significant decrease in income and employment.
Understanding the concept of a recession, its causes, and effects is crucial for both policymakers and individuals. Policymakers can use this understanding to implement measures to prevent or mitigate the effects of a recession. Individuals, on the other hand, can make informed decisions about their finances during such periods. It’s important to remember that while recessions are a normal part of the business cycle, their effects can be mitigated through sound economic policies and individual financial planning.