Recession, also known as ‘contraction’, is a period of decline in overall business activity. It is a part of the business cycle, a recurring rise and fall in economic activity. Many economists consider a nation’s economy to be in a recession if the output of goods and services fall for six consecutive months. A recession lasts an average of about a year. When recessions are unusually short and shallow, they are called mild. A recession that grows worse and lasts longer than the average is considered to be severe and could become a ‘depression’. During a nationwide recession, a country suffers a drop in buying, selling and production, and a rise in unemployment. A recession affects countless people, especially workers who are laid off. A recession may also hit an industry or region. Historically, nationwide recessions have been known to bring an end to inflation or even fall in prices.
Recessions have been known mostly to occur as a result of drop in spending in the economy. For example, when businesses are no more thriving as usual, orders for new goods may reduce. The manufacturers of such goods cut back on production in order to avoid ‘a glut’ in the market. As such, fewer workers are needed, and leading to the laying off of many workers and a rise in unemployment. Workers have less money to spend which decreases the demand for goods. As this pattern spreads throughout the economy a recession begins.
Government action also may usher in a recession. For example, when there is a cut in government spending, this may trigger off recession. Other recessions may result from shortages of vital products rather than from decreased spending. People’s expectations also play an important role in the decline of economic activity. If manufacturers or consumers foresee worsening conditions, they may cut back on their buying. By so doing, they could help bring on the slump they were trying to avoid. This process is referred to as “self-realising expectation.”
By means of its fiscal and monetary policies, a government can bring to an end a recession. Fiscal policy deals with government’s spending and taxing while it (the government) manages the nation’s money supply through its monetary policy. To put an end to a recession a government can increase its own spending, reduce taxes, or increase the money supply. These actions give more purchasing power to people who can now increase the demand for goods and services.
Many nations also have built-in stabilizers that work to stimulate the economy without any special government action. The progressive income tax system is one of such stabilizers, which taxes higher incomes more heavily than the lower ones. If a tax payer’s income falls, his or her taxes drop by an even greater percentage. As a result, a person has a larger income share to spend. Another automatic stabilizer is unemployment insurance, which provides benefit payments from the government for workers who lose their jobs. Such insurance gives these workers less money to spend than they had when they were employed, but more than if they had no income at all.
References
Douglas Greenwald & Associates (1983). The McGraw Hill dictionary of modern economics: A handbook of terms and organisations. New York: McGraw Hill Book Company.
Morrison, R. J. (1982). Recession: The World Book Encyclopaedia. USA: World Book Inc.
