Monday, October 11, 2010

Hi Viewers! It's been a pleasure serving you. I have personally noticed that many people nowdays are very much intrested to know the exact definition of Recession.Well, many have read many articles about the related topic and becomes unstatisfied with the answers what they had come across.All I have to say is it's not very easy to understand the exact meaning of "Reccession" only if you would try opening your mind "Out of the Box". Recently, my eyes got strucked to one of the Article related to Recession and i would like to share it. I would like to request you all to share this small piece of Information (if it's intresting) and Your feedbacks are highly appreciatable. 


A recession is a prolonged period of time where a nation's economy is slowing down or as the economists usually put it contracting. This slow down is actually characterized by a number of different trends, some of those trends are:
  • People buying less stuff
  • Decrease in factory production
  • Growing unemployment
  • Slump in personal income
  • An unhealthy stock market
But just because the economy is slowing down or contracting that doesn't automatically mean that there is a recession going on. In fact according to the actual definition of a recession the slowdown in the economy actually has to last for at least six months or two consecutive quarters. But even though we have a definition of what a recession is and we understand what it means to be in a recession, this definition actually causes more questions than it actually answers. The reason for this is that even though we talk about the US economy or any economy as an independent entity, it is actually the result of millions of people's actions. And economists use all sorts of terms to describe the connection between people's actions and the economy as a whole. But even though they use all sorts of terms you can get the basic understanding of how people's actions are connected to the economy as a whole by looking at a few basic concepts. Those concepts are: producers, consumers, markets, supply and demand.

Understanding producers and consumers

To put it in simple terms a nation's economy is the production and consumption of goods (food, clothes, cars, etc) and services (repairs, haircuts, lawn care, etc) in that particular nation. And basically anybody who is producing or consuming the goods or services in that nation plays some kind of role in that nation's economy. What this boils down to is that a nation is dependent on both businesses and consumers; businesses produce the goods and services, while consumers actually purchase the goods or use the services.

In fact this all boils down to the fact that production and consumption are intertwined, basically one cannot exist without the other. The reason for this is that in order for people to be able to consume things you actually need to have someone or something producing the things that the people are consuming. And in order to produce things you are going to need to consume things. A great example of needing to consume things in order to produce things is the fact that if you are producing clocks you are going to need to consume people's labor to make those clocks and you are going to be consuming natural resources when you are running the plant to produce those clocks.

Understanding markets

In the United States rather than being a market economy we are actually a modified market economy. But in either case in both types of economies production and consumption are connected in various markets. And in both cases a market is simply a place where consumers can go to buy things from producers and producers can go to sell things to consumers. In fact in most economies there are two basic kinds of markets, a physical market and an abstract market. But the most interesting thing to note is that in most cases everybody is going to be a producer and a consumer, but to be each of these they are going to be acting in different markets.

A physical market is where producers and consumers can go to buy and sell their goods. A great example of a physical market is a grocery store. The reason for this is that with a grocery store people can go to the store if they are looking to consume food. At the store they can purchase the food from the producers, but in most cases they are purchasing it through a series of middlemen. Two great examples of the abstract market are the labor market and the stock market. With the labor market businesses who want to consume work pay people to produce labor. And with the stock market people and businesses or consumers and producers buy and sell percentages of ownership for various companies.

Understanding supply and demand

Basically the goal of every producer is to make money and in order to make money the producer is going to need to sell their product at a higher price than what it cost them to make the product. And with consumers their main goal is to buy the products for the cheapest price possible. This is where supply and demand comes into play in the economy.

In any kind of market the action of both the producers and consumers determine the value of goods and services, basically the actions determine the price that is paid for goods and services. The producers are the ones who actually set the price of the products, but they set the price based on how their consumers are behaving. What this boils down to is if a product is not selling than the producer knows that the price is too high so they are going to need to lower it. But if a product is selling, but not selling quickly the producers know they have two options, lower the price again or decrease the supply of the product. How the consumers affect the price of the product is through demand, either they want the product or they don't. Producers need to pay close attention to the demand when pricing products, but even if there is a high demand for a certain product the producers still need to keep the price as low as possible because all the consumers need to do is buy it from somebody else.

How these factors work in a growing economy and a contracting economy

The first thing that you need to know about a growing economy is that in this type of economy consumer demand is actually increasing more than it is decreasing. And since there is an increasing demand producers are going to want to increase supply. But in order to increase supply producers are going to need to increase their consumption of other goods and services, including labor.

What this boils down to is that when labor increases people can get paid more for their work, which in turn means they have more money to spend on various products and services. And because people have more money to spend this means that demand is going to increase even more. And if the demand increases enough producers can actually increase their prices, in a hope of decreasing the demand a little bit. Overall in a growing economy both consumers and producers feel good about the growing economy and tend to make numerous investments because they know that if things keep going the way they have been their investment is going to increase in value.

But history of the economy has actually proven that no economy can expand forever, there just comes a time when the economy has to contract. And a prolonged period of contraction is known as a recession and as most of us know if the recession lasts for a prolonged period of time, several years, it is then referred to as a depression. In fact there are all kinds of things that can change the course of the economy, which can lead to a recession.

One huge factor that plays a role in a recession is the confidence level of the millions of consumers and producers. Basically if they stop feeling confident about the economy, including job security or the value of their investments, they are not going to buy as much stuff. But another thing that can help to start a recession is over-production, which means there is more supply of a product then there is demand for a product.

But no matter what the cause of the recession basically what happens is that people lose their jobs because the demand for products and services are not there. And when people lose their jobs they tend to spend as little money as possible because they need that money to live on. But also people who are working are affected because they are afraid that they might not be working much longer so rather than spend money on products and services they are going to save that money just in case they lose their job. In a contracting economy what happens is rather than spiraling upwards everything is spiraling downwards.

A perfect example of losing confidence in the economy is the behavior of U.S. after the September 11 terrorists' attacks. These attacks greatly shock the countries economy and it looked as if they were going to head into a recession, but the biggest industry that these attacks affected was the travel industry, but then people panicked and the effect spiraled downwards. But one thing that people don't realize is that different sectors of the economy are contracting all the time and the economy as a whole may contract on occasion too. But just because there are contractions that doesn't mean that we are in a recession. In fact economists will only declare a recession when the economy is contracting as a whole for an extended period of time.