recession - a layman's approach
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Before, understanding Recession, we need to understand the marketeconomy;
A] TWO STAGES OF MARKET ECONOMY
B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY
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A1] Growing Market Economy
A2] Declining Market Economy
A] TWO STAGES OF MARKET ECONOMY
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A1] Growing Market Economy
Starting Point = Willingness to buy
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A2] Declining Market Economy
Starting Point = Unwillingness to buy
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Producer wants his demand always to be highConsumer wants his buying cost always to be low
Actually, Demand is the price at which
consumer is ready to buy andproducer is ready to sell;
B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY
Producer Price
Consumer Price
Usually, we think;Demand = Quantity
But, here Demand = Price; This is because,Price decides the Quantity of Sales;Competitive Price = More Demand;In competitive Price = Less Demand;
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R ecession is the economy shrinking for twoconsecutive quarters (=6 months) with adecrease in the GDP (=Gross Domestic Product)
GDP = Value of all the reported goods and servicesproduced by the people operating in the country
C] What is Recession?
GDP = MONEY VALUE OF {C + I + G + (X M)}
C = Consumables, I = Gross Investments, G = Government Spending,X = Exports, M = Imports
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GDP is a good indicator of economy; Otherindicators 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?
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GDP is a good indicator of economy; Otherindicators 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, (>6months) then we go through DEP R ESSION
Economy;
C] What is Recession?
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RECESSION
= WHEN YOUR NEIGHBOR LOSES HIS JOB
There is a joke that economists quote to explain theDifference between Recession & Depression
C] What is Recession?
D EPRESSION
= WHEN YOU LOSE YOUR JOB
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Growing economy has tocome down if theproductionrate of goods & services wasmore than the actualconsumption;
D] What is a Business Cycle?
What goes up; Has to comedown;
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E] Why Recession happens?
E1] OVER PRODUCTION
E2] LOW CONFIDENCELEVEL
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A situation in which thesupply exceeds the nations
ability to consume what hasbeen produced;
Supply > Demand
E] Why Recession happens?
PSEUDO DEMAND
ACTUAL NEED WASNOT THERE;
WRONG PROJECTIONS
COMPANIESPRODUCED
MORE
E1] OVER PRODUCTION
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Low Confidence Levelof Millions of consumers andproducers after they hear many job cuts,Demand coming down,Companies bankruptcy,
etc
E] Why Recession happens?
Consumers are fearing that they may lose their jobs; So, they have lessconfidence to spend money and buy goods; This will result in reductionin demand in the market; Consumersstart saving money instead of spending money; This is a downward spiral in
the economy;
E2.1] Word of mouth
E2.2] Assignable Cause
E2.1] Word of mouth
E2] LOW CONFIDENCELEVEL
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Low Confidence Levelof Millions of consumers andproducers after they hear many job cuts,Demand coming down,Companies bankruptcy,
etc
E] Why Recession happens?
Consumers are fearing that they may lose their jobs; So, they have lessconfidence to spend money and buy goods; This will result in reductionin demand in the market; Consumersstart saving money instead of spending money; This is a downward spiral in
the economy;
E2.1] Word of mouth
E2.2] Assignable Cause
E2.1] Word of mouth
E2] LOW CONFIDENCELEVEL
Producers do not stock materials, they reduce their productions, gets into the
cost reduction activities, worried aboutthe profitability, etc
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Bad Incidences Happening;
Example: September 11 Terrorist Attack in US;International Airport block in Thailand;Mumbai Attacked in India;etc
Series of such incidencesleading into a kind of War
Please see next slides, for details on business impact;
E] Why Recession happens?
E2.2] Assignable Cause
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T errorists Attack on 11 th September in US
Created fear in people
People cancelled their travel plans
Airlines & Hotel Industries badly hit
Resulted in low occupancy rates
Airline & Hotel Industries offered discounts,gift coupons, to attract people
But, still, no improvement in occupancy rate
Airline & Hotel Industries startedCost Reduction activities CON T INUEDIN NEX T SLIDE
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Terrorists Attack on 11 th September in US
i] Reduce No. of flights ii] Lay off peopleiii] Salary reduction toNot laid off people
In flight meals reduced Low or No income to
spend and buy goods
They became careful due
to the fear of loss of job
Meals supplying company got the hit
Catering company now,lays off people
Demand for other goodscome down
Started saving money instead of spending
Demand for other goodscome down
Airline & Hotel Industries startedCost Reduction activities
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So, you can see how the hit on Airline and Hotel
industries can affect Un-related industriesin the end;
One industry can hit many other industries when the
confidence level of millions of consumers & producersdrastically comes down;
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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
F] How to know recession?
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It is unhealthy for any nation to be in Recession;So, Government will take certain countermeasuresto eliminate or reduce the Effect of recession for turnaround;
Important Point: Today, it is a market Economy
Producers;Can produce andsell at their prices
Consumers;Can decide to
buy or not;
Both Producers and Consumers are free to act; Not a forced action
G] How to come out of recession?
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Government has 2 plans
Fiscal Policies(By Govt.)
Monetary Policies(By RBI)
Hence, Government does not have direct control on Producers & theConsumers behavior; But, they can influence millions of Producers &Consumers with Governments policies;
Government influences theeconomy by changing how it (Government) spendsand collects money
RBI manipulatesthe available supply of money in the country
G] How to come out of recession?
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G] How to come out of recession?
1] Reduce reserveratio
More money
available for bank to give loans
Demand picksup; Marketcan recover;
Government manipulates the available supply of money in the country
Monetary Policies
What is Reserve Ratio?
Each bank has to keep a high % of their assets inRBI (Reserve Bank of India). These assets do notearn any interest to banks. This money kept inRBI is called Reserves; RBI sets certain ratioof this reserves and it is called Reserve Ratio
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G] How to come out of recession?
1] Reduce reserve
ratio
More money
available for bank to give loans
Demand picksup; Marketcan recover;
2] Lower theinterest rates
Individuals takemore loan
Government manipulates the available supply of money in the country
Monetary Policies
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G] How to come out of recession?
1] Reduce reserve
ratio
More money
available for bank to give loans
Demand picksup; Marketcan recover;
3] Use its ownreservedmoney to buy
Govt. bonds
It becomes anincome to Govt.to inject money
into the market
Government manipulates the available supply of money in the country
Monetary Policies
2] Lower theinterest rates
Individuals takemore loan
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I] WOW!!!!!!!!
RBIs Power or Governments Power is double-edgedsword; Sometimes, their policies to recover from recessioncan be counter-productive and it may further worsen thesituation;
Nations recession is controlled by the actions of everybody living
in that country;
If we advise our people to save money, then, the multiplication effect is thatthe demand will not pickup and recession will continue; Very peculiar!!!!! But, Iam not misguiding you; Just think from a macro level, if everybody in thecountry stops spending, what will happen?
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Most of the developing Economies like China,India;
Currently,Slow Down
Stage; Not yetin Recession
Currently,in Recession
Most of the developedEconomies like US,
Japan, Germany, etc
GDP GrowthRate Down; But,
Still expected to be Around 6% in India
GDP GrowthRate Negative;
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HOPING THIS TIME
RECESSION VANISHESSOON SO THAT
INDIA GETS BACK
TO ITS STRONGER GDP GROWTH RATE
OF 8% T O 10%(THOUGH THE EXPERSTS
SAY IT WILL LAST TILLQ3 OF 2009)
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