Tuesday, October 27, 2015

Behind the Hitch: The Causes of Economic Recession (part 1 of 2)


An economic situation in which a country’s gross domestic product or output is sustaining a negative growth for at least two consecutive quarters or six months is called an economic recession.  For the National Bureau of Economic Research (NBER), “recession is a significant decline in economic activity lasting more than a few months”.

Economic recession lasts for eleven months and may reach until two years.  While a recession that is short lived is called economic correction.  Meanwhile a sustained recession turns into a depression.

What causes recessions to happen?

There are complex reasons as well as simple reasons why economic recessions happen.  John Maynard Keynes states that there are “animal spirits” as driving elements for a recession.  “Animal spirits” could be confidence, uncertainty, and pessimism.  These “animal spirits” prevent objectivity and quantitative analysis.

An example where these “animal spirits” take over, is when consumers lose interest on products and outputs.  On the eve of an economic recession, there will be overproduction.  Supply will exceed the demands of products and goods.

This will push companies to increase prices and consumers will lose confidence and will be uncertain in purchasing products.  Until the event that consumers will stop buying. Another example for this element driving recession will be the psychological impact the events of the September 11 attacks on consumers and the people.

Some economists suggest that recession may not only be caused by events that have large or huge impact on the people.  Events that hurt particular companies or industries can also cause recession. Major innovations or change in a price of a major component needed in the completion of the product can have dramatic effects on some firms.  These may cause reduction of workers or production.

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