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Before, understanding

“Recession”,
we need to understand the
market
economy;
A] TWO STAGES OF MARKET ECONOMY

B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY


A] TWO STAGES OF MARKET ECONOMY

A1] Growing Market Economy

A2] Declining Market Economy


A1] Growing Market Economy

Starting Point = Willingness to buy


A2] Declining Market Economy
tarting Point = Unwillingness to buy
B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

oducer wants his demand always to be high


nsumer wants his buying cost always to be low
Actually, Demand is the price at whic
consumer is ready to buy and
producer is ready to sell;
Usually, we think;
Demand = Quantity
But, here Demand = Price;
This is because,
Price decides the Quantity of Sales;
Producer Price
Competitive Price = More Demand;
Consumer Price
In competitive Price = Less Demand
C] 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 + (X – M)}

Consumables, I = Gross Investments, G = Government Spendin


X = Exports, M = Imports
C] What is Recession?
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;
C] What is Recession?
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) then we go through
“DEPRESSION” Economy;
C] What is Recession?

There is a joke that economists quote to


explain the
Difference between “Recession &
Depression” RECES SION

= WHEN YOUR NEIGHBOR LOSES HIS JOB

DEPRE SSION

= WHEN YOU LOSE YOUR JOB


D] What is a Business Cycle?

What goes up; Has to Growing economy has


come to
down; come down if the
production
rate of goods &
services was more
than the actual
consumption;
E] Why Recession happens?

E2] LOW
E1] OVER
CONFIDENCE
PRODUCTION
LEVEL
E] Why Recession happens?

E1] OVER
PRODUCTION

PSEUDO DEMAND A situation in which


ACTUAL NEED WAS the
NOT THERE; supply exceeds the
WRONG PROJECTIONS
nation’s
COMPANIES
ability to consume
PRODUCED what has
MORE
been produced;
E] Why Recession happens?

E2] LOW E2.1] Word of mouth


CONFIDENCE
LEVEL
E2.2] Assignable Cause

E2.1] Word of mouth

Low Confidence Level Consumers are fearing that they may


of Millions of lose their jobs; So, they have less
consumers and confidence to spend money and buy
producers after they goods; This will result in reduction
hear many job cuts, in demand in the market; Consumers
Demand coming down,start saving money instead of spendin
money; This is a downward spiral in
Companies’ bankruptcy,
etc the economy;
E] Why Recession happens?

E2] LOW E2.1] Word of mouth


CONFIDENCE
LEVEL
E2.2] Assignable Cause

E2.1] Word of mouth

Low Confidence Level Consumers


Producers are fearing
do not stockthat they may
materials, th
of Millions of lose theirtheir
jobs;productions,
So, they have less
reduce gets into th
consumers and confidence to spend money and buy
cost reduction activities, worried abo
producers after they goods; This will result
the profitability, etc…in reduction
hear many job cuts, in demand in the market; Consumers
Demand coming down,start saving money instead of spendin
money; This is a downward spiral in
Companies’ bankruptcy,
etc the economy;
E] Why Recession happens?
E2.2] Assignable Cause
Bad 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 impac


Terrorists’ Attack on 11th September in US

Created fear in people

People cancelled their travel plans

Resulted in low occupancy rates

Airlines & Hotel Industries badly hit

Airline & Hotel Industries offered discounts,


gift coupons, to attract people
But, still, no improvement in occupancy
rate
Airline & Hotel Industries started
CONTINUED
“Cost Reduction” activities
IN NEXT SLIDE
Terrorists’ Attack on 11th September in US

Airline & Hotel Industries started


“Cost Reduction” activities

iii] Salary reduction to


i] Reduce No. of flights ii] Lay off people
“Not laid off people”

Low or No income to They became careful due


In flight meals reduced
spend and buy goods to the fear of loss of job

Meals supplying company Demand for other goods Started saving money
got the hit come down instead of spending

Catering company now, Demand for other goods


lays off people come down
o, you can see how the hit on Airline and Hotel
dustries can affect “Un-related” industries
the end;

ne industry can hit many other industries when the


onfidence level of millions of consumers & producers
astically comes down;
F] How to know recession?

Indicators to say a nation is in recession;

- People buying less stuff


- Decrease in factory production
- Growing unemployment
- Slump in personal income
- An unhealthy stock market
G] How to come out of recession?

unhealthy for any nation to be in Recession;


Government will take certain countermeasures
iminate or reduce the Effect of recession for turnaro
Important Point:
Today, it is a market Economy

Producers; Consumers;
Can produce and Can decide to
sell at their prices buy or not;

th Producers and Consumers are free to act; Not a forced act


G] How to come out of recession?
, Government does not have direct control on Producers
mers’ behavior; But, they can influence millions of Producer
mers with Government’s policies;

Government has 2 plans

Fiscal Policies Monetary Policies


(By Govt.) (By RBI)

Government influences the RBI manipulates


economy by changing how the available supply of
it (Government) spends money in the country
and collects money
G] How to come out of recession?

FiscalGovernment influences the economy by changin


how it (Government) spends and collects money
Policies
1] Tax cuts for More money
businesses or available for
for individuals spending

2] More Spending Individuals get Demand picks


by Govt. to salary and spend up; Market
create jobs money can recover;
3] Automatic
Some income to
fiscal policy;
unemployed
Unemployment
people to spend
Insurance
G] How to come out of recession?

Monetary Government manipulates the available supply


Policiesof money in the country
More money
1] Reduce reserve
available for bank
ratio
to give loans

What is Reserve Ratio?


Demand picks
up; Market
Each bank has to keep a high % of their assets in
RBI (Reserve Bank of India). These assets do not
can recover;
earn any interest to banks. This money kept in
RBI is called “Reserves”; RBI sets certain ratio
of this reserves and it is called “Reserve Ratio”
G] How to come out of recession?

Monetary Government manipulates the available supply


Policiesof money in the country
More money
1] Reduce reserve
available for bank
ratio
to give loans

2] Lower the Individuals take


Demand picks
interest rates more loan up; Market
can recover;
G] How to come out of recession?

Monetary Government manipulates the available supply


Policiesof money in the country
More money
1] Reduce reserve
available for bank
ratio
to give loans

2] Lower the Individuals take


Demand picks
interest rates more loan up; Market
can recover;
3] Use its own It becomes an
reserved income to Govt.
money to buy to inject money
Govt. bonds into the market
I] WOW!!!!!!!!

RBI’s Power or Government’s Power is double-edged


sword; Sometimes, their policies to recover from recession
can be counter-productive and it may further worsen the
situation;

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,
am not misguiding you; Just think from a macro level, if everybody in the
country stops spending, what will happen?

Nation’s recession is controlled by the actions of


everybody living
in that country;
I] WOW!!!!!!!!

Most of the developing Currently, GDP Growth


Economies like China, Slow Down Rate Down; But,
India; Stage; Not yet Still expected to be
in Recession Around 6% in India

Most of the developed


Economies like US, Currently, GDP Growth
Japan, Germany, etc in Recession Rate Negative;
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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