Recession

A recession is usually defined in macroeconomics as a fall of a country's real Gross Domestic Product in two or more successive quarters of a year. A recession may also involve falling prices, which can lead to a depression; alternatively it may involve sharply rising prices (inflation), in which case this process is known as stagflation. Most recessions lead to falling inflation rates or what is called disinflation.

Causes

Recessions are mostly caused by external economic shocks, or the unwinding of major imbalances in the economy. The latter mechanism is based substantially on the role of consumer confidence and business confidence, which are important for example for individuals and organisations to decide whether their current investment or debt levels are excessive (or sufficient). A wave of bad news (eg job losses at a big company) may lead enough people to worry about the future, increase their saving and reduce their spending, so that further bad news is caused (as sales and investment goes down). On a large enough scale, this can cause a recession. (See also accelerator effect and multiplier.)

Related Topics:
Consumer confidence - Business confidence - Accelerator effect - Multiplier

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The greatest worldwide recession that humanity has ever experienced was the beginning of the Great Depression (late 1920s and 1930s); other notable recessions include the two Oil Crises in the 1970s and the Long Depression of the late nineteenth century. The sharpest recession on record is that following the First World War when hyperinflation hit much of Europe; this recession did not last very long, however.

Related Topics:
Great Depression - Oil Crises - Long Depression - First World War - Hyperinflation

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There is some debate as to whether or not a recession is a normal part of the business cycle. The definition is set where it is (reduction in GNP for two successive quarters) because this is supposed to be an unusual event, outside the normally-expected cycles in which no more than one quarter should go by without some kind of growth. An alternative view of this is that of Karl Marx for whom economic "crisis" is symptomatic of a dysfunctional society, capitalism, forcing valuable social resources to be destroyed in order to return the system to profitability. Another alternative view is that the GNP and GDP are relevant only to waged jobs, and that the expansion of money supply to support certain activities, e.g. chronic hospital care, political lobbying, advertising, can encourage those activities even though they actually represent declines in quality of life. Some argue it all depends on what one means by 'normal', and whether one thinks the definition is relevant to it.

Related Topics:
Business cycle - Cycles - Karl Marx - Money supply - Declines in quality of life

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