wht is recession

Before, understanding “Recession”,

we need to understand the market

economy;

A] TWO STAGES OF MARKET ECONOMY

B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

A1] Growing Market Economy

A2] Declining Market Economy

A] TWO STAGES OF MARKET ECONOMY

A1] Growing Market Economy

Starting Point = Willingness to buy

A2] Declining Market Economy

Starting Point = Unwillingness to buy

Producer wants his demand always to be high

Consumer wants his buying cost always to be low

Actually, Demand is the price at which

consumer is ready to buy and

producer 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;

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

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

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?

RECESSION

= WHEN YOUR NEIGHBOR LOSES HIS JOB

There is a joke that economists quote to explain the

Difference between “Recession & Depression”

C] What is Recession?

DEPRESSION

= WHEN YOU LOSE YOUR JOB

Growing economy has to

come down if the

production

rate of goods & services was

more than the actual

consumption;

D] What is a Business Cycle?

What goes up; Has to come

down;

E] Why Recession happens?

E1] OVER

PRODUCTION

E2] LOW

CONFIDENCE

LEVEL

A situation in which the

supply exceeds the nation’s

ability to consume what has

been produced;

Supply > Demand

E] Why Recession happens?

PSEUDO DEMAND

ACTUAL NEED WAS

NOT THERE;

WRONG PROJECTIONS

COMPANIES

PRODUCED

MORE

E1] OVER

PRODUCTION

Low Confidence Level

of Millions of

consumers and

producers 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 less

confidence to spend money and buy

goods; This will result in reduction

in demand in the market; Consumers

start 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

CONFIDENCE

LEVEL

Low Confidence Level

of Millions of

consumers and

producers 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 less

confidence to spend money and buy

goods; This will result in reduction

in demand in the market; Consumers

start 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

CONFIDENCE

LEVEL

Producers do not stock materials, they

reduce their productions, gets into the

cost reduction activities, worried about

the profitability, etc…

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 impact;

E] Why Recession happens?

E2.2] Assignable Cause

Terrorists’ Attack on 11th 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 started

“Cost Reduction” activitiesCONTINUED

IN NEXT SLIDE

Terrorists’ Attack on 11th September in US

i] Reduce No. of flights ii] Lay off peopleiii] Salary reduction to

“Not laid off people”

In flight meals reducedLow 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 goods

come down

Started saving money

instead of spending

Demand for other goods

come down

Airline & Hotel Industries started

“Cost Reduction” activities

So, you can see how the hit on Airline and Hotel

industries can affect “Un-related” industries

in the end;

One industry can hit many other industries when the

confidence level of millions of consumers & producers

drastically comes down;

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?

It is unhealthy for any nation to be in Recession;

So, Government will take certain countermeasures

to eliminate or reduce the Effect of recession for turnaround;

Important Point:

Today, it is a market Economy

Producers;Can produce and

sell 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?

Government has 2 plans

Fiscal Policies(By Govt.)

Monetary Policies(By RBI)

Hence, Government does not have direct control on Producers’ & the

Consumers’ behavior; But, they can influence millions of Producers &

Consumers with Government’s policies;

Government influences the

economy by changing how

it (Government) spends

and collects money

RBI manipulates

the available supply of

money in the country

G] How to come out of recession?

G] How to come out of recession?

Government influences the economy by changing

how it (Government) spends and collects money

1] Tax cuts for

businesses or

for individuals

More money

available for

spending

Demand picks

up; Market

can recover;

2] More Spending

by Govt. to

create jobs

Individuals get

salary and spend

money

3] Automatic

fiscal policy;

Unemployment

Insurance

Some income to

unemployed

people to spend

Fiscal

Policies

G] How to come out of recession?

1] Reduce reserve

ratio

More money

available for bank

to give loans

Demand picks

up; Market

can 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 in RBI (Reserve Bank of India). These assets do not 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?

1] Reduce reserve

ratio

More money

available for bank

to give loans

Demand picks

up; Market

can recover;

2] Lower the

interest rates

Individuals take

more loan

Government manipulates the available supply

of money in the country

Monetary

Policies

G] How to come out of recession?

1] Reduce reserve

ratio

More money

available for bank

to give loans

Demand picks

up; Market

can recover;

3] Use its own

reserved

money to buy

Govt. bonds

It becomes an

income to Govt.

to inject money

into the market

Government manipulates the available supply

of money in the country

Monetary

Policies

2] Lower the

interest rates

Individuals take

more loan

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;

Nation’s 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 that

the demand will not pickup and recession will continue; Very peculiar!!!!! But, I

am not misguiding you; Just think from a macro level, if everybody in the

country stops spending, what will happen?

Most of the developing

Economies like China,

India;

Currently,

Slow Down

Stage; Not yet

in Recession

Currently,

in Recession

Most of the developed

Economies like US,

Japan, Germany, etc

GDP Growth

Rate Down; But,

Still expected to be

Around 6% in India

GDP Growth

Rate Negative;

I] WOW!!!!!!!!

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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