9764983 Recession

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WHAT IS RECESSION?

Author:

DivyaVeerabhadra

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Before, understanding Recession,

we need to understand the marketeconomy;

TWO STAGES OF MARKET ECONOMY

TWO FACTORS OF MARKET; - DEMAND & SUPPLY

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TWO STAGES OF MARKET ECONOMY

A1] Growing Market Economy

A2]Declining Market Economy

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Growing Market Economy

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Declining Market Economy

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TWO FACTORS OF MARKET; - DEMAND &

SUPPLYProducer wants his demand always to be high

Consumer wants his buying cost always to be lowActually, Demand is the price at

whichconsumer is ready to buy and

producer is ready to sell;

Producer Price

Consumer Price

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;

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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 + (XM)}

C = Consumables, I = Gross Investments, G = Government

Spending,

X = Exports, M = Imports

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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;

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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) thenwe go through DEPRESSION Economy;

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There is a joke that economists quote to explain the

Difference between Recession & Depression

RECESSION

= WHEN YOUR NEIGHBOR LOSES HIS JOBDEPRESSION

= WHEN YOU LOSE YOUR JOB

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What is a Business Cycle?

What goes up; Has to come

down;Growing economy has to

come down if the productionrate of goods & services was more

than the actual consumption;

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Why Recession happens?

E1] OVER

PRODUCTION E2] LOWCONFIDENCELEVEL

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OVERPRODUCTION

PSEUDO DEMAND

ACTUAL NEED WAS

NOT THERE;

WRONG PROJECTIONS

COMPANIES

PRODUCED

MORE

A situation in which thesupply exceeds the nations

ability to consume what has

been produced;

Supply > Demand

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Why Recession happens?E2] LOW CONFIDENCE

LEVELE2.1] Word of mouth

E2.2] AssignableCauseE2.1] Word of mouthLow Confidence Level

of Millions of

consumers andproducers 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 reductionin demand in the market; Consumers

start saving money instead of spending

money; This is a downward spiral in

the economy;

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Assignable Cause

LOW

CONFIDENCE

LEVEL

Word of mouth

Word of mouth

Low Confidence Level

of Millions of

consumers andproducers after they

hear many job cuts,

Demand coming down,

Companies bankruptcy,

etc

Producers do not stock materials, they

reduce their productions, gets into the

cost reduction activities, worried about

the profitability, 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 reductionin demand in the market; Consumers

start saving money instead of spending

money; This is a downward spiral in

the economy;

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Why Recession Happens?

Assignable CauseBad 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;

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Terrorists Attack on 11th September in USCreated fear in peoplePeople cancelled their travel plansResulted in low occupancy rates

Airlines & Hotel Industries badly hitAirline & Hotel Industries offered discounts,

gift coupons, to attract people

But, still, no improvement in occupancy

rateAirline & Hotel Industries started

Cost Reduction activities CONTINUEDIN NEXT SLIDE

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Airline & Hotel Industries started

Cost Reduction activities

i] Reduce No. of flightsIn flight meals reducedMeals supplying companygot the hitCatering company now,lays off people

ii] Lay off peopleLow or No income tospend and buy goodsDemand for other goodscome down

iii] Salary reduction toNot laid off people

They became careful dueto the fear of loss of jobStarted saving moneyinstead of spendingDemand for other goods

come down

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So, you can see how the hit on Airline and Hotelindustries can affect Un-related industries

in the end;

One industry can hit many other industries when the

confidence level of millions of consumers & producersdrastically comes down;

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How to know recession?

People buying less stuff

Decrease in factory production

Growing unemployment

Slump in personal income

An unhealthy stock market

Indicators to say a nation is in recession;

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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 andsell at their prices

Consumers;Can decide to

buy or not;

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

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Hence, Government does not have direct control on Producers & the

Consumers behavior; But, they can influence millions of Producers &

Consumers with Governments policies;Government has 2 plans

Fiscal Policies(By Govt.) Monetary Policies(By RBI)

Government influences the

economy by changing how

it (Government) spendsand collects money

RBI manipulates

the available supply ofmoney in the country

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FiscalPolicies Government influences the economy bychanging

how it (Government) spends and collects

money

Demand picks

up; Market

can recover;

More money

available for

spendingIndividuals get

salary and spend

moneySome income to

unemployedpeople to spend

3] Automatic

fiscal policy;

Unemployment

Insurance

2] More Spending

by Govt. to

create jobs

1] Tax cuts for

businesses or

for individuals

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Demand picks

up; Market

can recover;

Government manipulates the available supply

of money in the countryMonetaryPolicies

1] Reduce reserveratio

More money

available for bank

to give loans

What is Reserve Ratio?

Each bank has to keep a high % of their assets inRBI (Reserve Bank of India). These assets do notearn any interest to banks. This money kept inRBI is called Reserves; RBI sets certain ratioof this reserves and it is called Reserve Ratio

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Demand picks

up; Market

can recover;Individuals takemore loan

More moneyavailable for bank

to give loans


2] Lower the

interest rates

MonetaryPolicies Government manipulates the available supplyof money in the country

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MonetaryPolicies Government manipulates the available supplyof money in the country


2] Lower the

interest rates

3] Use its ownreserved

money to buyGovt. bonds

More money

available for bank

to give loans

Individuals takemore loanIt becomes anincome to Govt.

to inject moneyinto the market

Demand picks

up; Market

can recover;

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WOW!!!!!!!!RBIs Power or Governments Power is double-edged

sword; Sometimes, their policies to recover from recession

can be counter-productive and it may further worsen thesituation;

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 thecountry stops spending, what will happen?

Nations recession is controlled by the actions of

everybody living

in that country;

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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% inIndia

Most of the

developed

Economies like US,

Japan, Germany, etc

Currently,

in Recession

GDP Growth

Rate Negative;

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HOPING THIS TIME

RECESSION VANISHES

SOON SO THAT

INDIA GETS BACK

TO ITS STRONGER

GDP GROWTH RATE

OF 8% TO 10%

(THOUGH THE EXPERSTS

SAY IT WILL LAST TILL

Q3 OF 2009)

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9764983 Recession