What is Recession? The cause of the economic recession

Recession is a fundamental macroeconomic term. This term is used very commonly and is mentioned frequently recently.

What is recession?

Economic recession is defined as follows: “Economic recession is a macroeconomic term used to refer to a significant decrease in overall economic activity in a given area”.

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The recession is often observed after two consecutive quarters of economic decline, or more specifically, a negative economic growth, reflected by the GDP combined with other monthly indicators such as employment.

Economic recession was evident in industrial production, employment, real income and trade.

See also: What is CPI? How to calculate CPI

Cause of the recession

Many economic theories have tried to explain why and how an economy deviated from the long-term growth trend and entered a temporary recession. These theories are broadly classified according to economic, financial or psychological factors, and several theories act as a bridge between the aforementioned theories.

Some economists believe that real changes and structural changes in industries are the best explanation for the causes and ways of economic downturns. For example, a sudden, prolonged rise in oil prices due to a geopolitical crisis can lead to the cost of many industries skyrocketing, or the emergence of a revolutionary new technology can cause entire other industries. become obsolete.

The Real Business Cycle Theory is the best modern example of these theories, explaining recession is the natural reaction of rational market participants to one or more negative impact shocks. real, unpredictable for the economy.

Some other theories argue that recession depends on financial factors. These theories focus on credit boom and financial risk during a time when the economy is doing well before a recession, or on the tightening of credit and money ahead of a recession. , or both.

Theories based on recession psychology tend to look at the excessive euphoria of the previous economic boom or deep pessimism in the downturn environment as explaining why the recession can happen and even exist.

Keynesian economic theory is a prime example of this, for it shows that once a recession begins, for whatever reason, when the swarm psychology of actors in the economy turns. Therefore, investors can build reality according to their expectations about the pessimistic psychology of the market, which leads to a decrease in income and a decrease in spending.

The exact cause of the economic downturn is still unclear as experts are still debating. However, policymakers agree that economic downturns are often affected by many factors, from financial market crashes, trade wars, stagnant supply, and deflated market bubbles. to natural disasters and epidemics.

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Psychologists suggest that the herd effect and the general fear of people when the economy is on a cyclical decline will trigger a recession. Businesses lay off employees, limit investment to save capital. People limit investment to save living budget.

Another cause that can also trigger a recession is too high a debt ratio, causing asset markets such as stocks and real estate to deflate. The high debt caused a series of businesses and consumers to use their income for debt repayment rather than investment spending, causing the economy to go down.

Usually, the government will adopt macro policies to deal with an economic downturn, such as increasing the money supply, reducing taxes and aggressive public spending. However, these policies will also increase public debt, budget deficit and have many long-term consequences.

When a recession occurs, the overall activities of the economy from consumption, investment, public spending to import and export all appear to be negatively affected. Usually, the stock markets, real estate or other highly liquid assets will be very sensitive to information about recessions.

In previous recessions, the stock market often crashed as investors fled, selling off stocks in search of safe havens. The real estate market is usually gloomy before each recession but takes longer to recover after the crisis is over.

Unemployment will also be extremely high during a recession. Low-skilled, inexperienced or young workers will often be hardest hit in the recession when a series of businesses go bankrupt or lay off employees.

Under the influence of the economic recession, people’s living standards will drop sharply due to lower incomes. High unemployment will negatively affect the stability of countless households as well as erode the wealth of many people.

The decline in living standards causes more and more people to live in poverty, thereby creating social unrest, affecting education, health or even reproduction when households do not want to have children. during the recession. This is not good news for countries with aging populations.

In general, a recession is a bad thing that no person or country wants to have. However, the economy does not always go as planned and challenges always appear to test the will and solidarity of people in many countries.

See also: Recession – Wikipedia

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