Post on 02-Jan-2016
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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
Producer wants his demand always to be high
Consumer wants his buying cost always to be lowActually, 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 = QuantityBut, 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 adecrease 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;
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;
RECESSION
= WHEN YOUR NEIGHBOR LOSES HIS JOB
There is a joke that economists quote to explain theDifference between “Recession & Depression”
DEPRESSION
= WHEN YOU LOSE YOUR JOB
Growing economy has tocome down if the productionrate of goods & services was more than the actual consumption;
D] What is a Business Cycle?
What goes up; Has to comedown;
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 WASNOT THERE;
WRONG PROJECTIONS
COMPANIES PRODUCED
MORE
E1] OVER PRODUCTION
Low Confidence Level of Millions of consumers and producers after theyhear 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 reductionin 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 theyhear 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 reductionin 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, theyreduce their productions, gets into thecost reduction activities, worried aboutthe 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 incidencesleading 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” activities CONTINUED
IN NEXT SLIDE
Terrorists’ Attack on 11th September in US
i] Reduce No. of flights ii] Lay off people iii] Salary reduction to“Not laid off people”
In flight meals reduced Low or No income to spend and buy goods
They became careful dueto the fear of loss of job
Meals supplying companygot the hit
Catering company now,lays off people
Demand for other goodscome down
Started saving moneyinstead of spending
Demand for other goodscome 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 & producersdrastically 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’ & theConsumers’ behavior; But, they can influence millions of Producers &Consumers with Government’s policies;
Government influences the economy by changing howit (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 moneyavailable forspending
Demand picksup; Market can recover;
2] More Spending by Govt. to create jobs
Individuals getsalary and spendmoney
3] Automatic fiscal policy; Unemployment Insurance
Some income tounemployed people to spend
Fiscal Policies
G] How to come out of recession?
1] Reduce reserve ratio 1] Reduce reserve ratio
More moneyavailable for bankto give loans
More moneyavailable for bankto give loans
Demand picksup; Market can recover;
Demand picksup; Market can recover;
Government manipulates the available supply of money in the country Government manipulates the available supply of money in the country
MonetaryPolicies
MonetaryPolicies
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”
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 moneyavailable for bankto give loans
Demand picksup; Market can recover;
2] Lower the interest rates
Individuals takemore loan
Government manipulates the available supply of money in the country
MonetaryPolicies
G] How to come out of recession?
1] Reduce reserve ratio
More moneyavailable for bankto give loans
Demand picksup; Market can recover;
3] Use its own reserved money to buy Govt. bonds
It becomes anincome to Govt.to inject moneyinto the market
Government manipulates the available supply of money in the country
MonetaryPolicies
2] Lower the interest rates
Individuals takemore 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 thatthe 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 thecountry 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 developedEconomies like US,
Japan, Germany, etc
GDP GrowthRate Down; But,
Still expected to beAround 6% in India
GDP GrowthRate Negative;
I] WOW!!!!!!!!
HOPING THIS TIMERECESSION VANISHES
SOON SO THATINDIA GETS BACKTO ITS STRONGER
GDP GROWTH RATEOF 8% TO 10%
(THOUGH THE EXPERSTSSAY IT WILL LAST TILL
Q3 OF 2009)
HOPING THIS TIMERECESSION VANISHES
SOON SO THATINDIA GETS BACKTO ITS STRONGER
GDP GROWTH RATEOF 8% TO 10%
(THOUGH THE EXPERSTSSAY IT WILL LAST TILL
Q3 OF 2009)