What Causes Economic Recession? Learn From Past

What is Economic recession?

As per the definition provided by the national Bureau of Economic Research, recession is the massive decline in economy that lasts for a period of time and it affects the real GDP (gross domestic product), real income, industrial production, wholesale-retail sales and employment. In other words, it can be said that recession occurs when business stops expanding; the real GDP of the country lessens for a certain period of time, and housing prices see downfall and the rate of unemployment increases.

recessionWhat happened during the Great Recession of 2007-2008?

In the recent past, the world has witnessed a dark phase in global economy in the year 2007-2008 when the Great Recession took place. The irrational loaning policy was the root of the economic downfall. At that time, allured by the provocative lending policies, people started investing on housing projects as they thought it will continue rising. But, to everyone’s shock, the bubble burst in the year 2006 and prices of housing started falling down. Due to the rising foreclosure rate, the banks and hedge funds started panicking as they suddenly faced a huge amount of loss. Towards the end of the year 2007, the banks became so afraid to give loan to each to avoid the deposit of the toxic loans, that it led the government finally come out to help. To save these financial organizations from getting bankrupt, government gave $700 billion bailout. By the end of 2008, the whole world witnessed an escalating rate of unemployment due to this huge recession.

What have we learnt from our experience?

  • High rates of interest are prominent harbinger of recession as they constrain liquid money.
  • Inflation also plays vital role in welcoming recession as when inflation or price increases the value of money decreases.
  • Decreasing consumer confidence is again a great factor behind recession. When consumers start believing that market is low, they stop investing which is again bad for the economic growth.
  • Reduction in real wage can also hamper the economy and bring recession. If workers’ paychecks don’t increase with inflation, then their purchasing power decreases and finally adds up to the reason of declining economy of the country.

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