case study on Recession of 2008- 09 & real gdp recent history

CASE STUDY

1. The Recession of 2008-2009


• In 2008-2009, the US economy experienced a financial crisis and a serve downturn in economy. There was a boom in part, fuelled by low interest loan in the housing market. In the aftermath of the recession of 2001, the Federal Reserve lowered interest rate to historically low level.

• In addition to lower interest rate, various developments in the mortgage market made it easier for subprime borrowers. One development was securitization- the process by which a financial institution makes loan and then bundles them into financial instruments called mortgage-backed securities and then these securities were sold to other institutions.


• Some government policies forces drove up housing demand and housing prices, proved unsustainable. From 2006 to 2009, 30% rise in housing price nationwide.


• In this case, however, the price decline had two related consequences:1.During the housing boom, many homeowners had bought their houses with mostly borrowed money and minimal down payments. When the houses prices declined, these house owners were underwater. Many of this owners stopped paying their loans. The banks servicing the mortgages responded to these defaults by taking the houses away and selling them off. The bank goal was to recoup whatever they could from bad loans.


2.Various financial institutions that owned mortgage-backed securities suffered huge losses. In essence by borrowing large sums to buy high-risk mortgage, these companies had bet that house prices would keep raising but this bet turned bad, because of these large losses, many financial institutions didn’t have fund to loan out.• As a result of all these events, the country experienced a large shift in

aggregate demand. Real GDP and employment falls sharply. Real GDP declined almost 4% between fourth quarters of 2007.


• The unemployment rate rose from 4.4% in May 2007 to 10.1% in oct 2010.• For overcoming this US government made three policies:1.The fed cut its target for the federal funds rate from 5.25% in sep 2007 to absolute zero in dec 2008. The federal bank also started buying mortgage-securities from in open market operations. By purchasing these from banking systems, the fed provided banks with additional funds that the banks would makes loans more readily available.


2. In oct 2008, congress appropriated $700 billion for the treasury to use to rescue financial system. Much of these funds were used for equity injections into banks. Treasury put funds into banking system, which banks could use to make loans.3. When Barack Obama become president in jan 2009 his first initiative was a large increase in government spending and signed $787 billion stimulus bill on feb 2009.

2.Real GDP Recent History…

2.Real GDP Recent History…..

• In figure, quarterly data on real GDP from the US economy since 1965.


• The US real GDP of the US economy in 2009 was almost four times its 1965 level. Put differently, the output of goods and services produced in the US has grown average about 3% per year. This continued growth in real GDP enables the typical American to enjoy greater economic prosperity than his or her parents and grandparents did.


• A second feature of GDP data is that growth is not steady. The upward climb of real GDP occasionally interrupted by periods during which GDP declines, called recessions. Recessions are associated not only with lower incomes but also with other forms of economic distress: rising unemployment, falling profits etc.


Define Real GDP and Nominal GDP? Which is a better measure of economic well-being? Why?• GDP: It is the total market value of all final goods and services produced

within a country in a given period of time.• Nominal GDP values the production of goods and services at current

prices.• Real GDP values the production of goods and services at constant

prices.


• An accurate view of the economy requires adjusting nominal to real GDP by using the GDP deflator.• Real GDP is a better measure of economic well-being. Reasons:• Nominal GDP gives value of goods and services at current prices but

Real GDP gives value at constant prices so that in nominal GDP values which are showed that values are calculated with increased price (known as inflation). So Nominal GDP doesn’t provide real values.


• In calculation of real GDP one year price is consider as price of base year so that no effect of inflation on real GDP which provides real values.• It provides real quantity and real price so its consider as a better measure

of economic well-being.• GDP deflator can be calculated to measure changes in real and nominal

GDP.

3.Near empty restaurant and off season miniature

Golf…….

3.Near empty restaurant and off season miniature Golf…….

SUMMARY

Empty restaurant • STAYING open can be profitable , even with many tables open.• Restaurant owner must keep in mind the distinction between fixed and variable cost,

shutting during lunch could not reduce this cost.• It might seem that the revenue from few customer could not possibly cover the cost of

running the restaurant.• This cost are sunk( not recoverable in future) in short run• The owner shut down the restaurant at lunch time only if the revenue from few lunch time

customer fails to cover restaurant’ s variable cost• Variable cost are changeable


Problems of empty restaurant :• A restaurant is not open in the lunch time • Owner must keep in mind that distinction between fixed and variable cost • These cost are sunk in short run• Many of the restaurant’s kitchen , equipment , table, plate, silverware, and so on

are fixed • Setting down during lunch would not reduce these cost • Variable cost , the price of additional food and the wages of the extra staff are

relevant


AlternativesThe owner shut down restaurant at the lunch time only if the revenue from the few lunching customers fails to cover the restaurants variable cost


Comparison for empty restaurant: • During lunch time in India the employees, subordinates etc. cannot easily go for lunch in restaurants as

they are expensive ,time consuming and other such factors are taken into consideration before going for lunch on office time

• In foreign country like USA there is a easily availability of street food which is equal to restaurants and so employees do choose to go there as they are satisfactory in terms of pricing ,quality and fast service compared to India

• serving lunch in café is majorly not seen in India while in USA both is possible at same time• in India most of people are from corporate level and they do not get time in afternoon for lunch so in

India it is advisable to shut down during lunch time while in USA it is not preferable because they cover their variable cost and make some profit and Indian people prefer dinner rather than lunch


RecommendationIn India if the restaurant is kept open than variable cost is more • Sunk cost is not recoverable in future • So we advise that the restaurant in India should be kept closed during

lunch time


Conclusion

• So we advise that the restaurant in India should be kept closed during lunch time .• While in USA restaurants should be open in lunch

time because it can generate revenue.


SUMMARYMiniature golf• A miniature golf remains empty because owners even bother

miniature golf to stay open.• Belief of an owner that few player could not possibly cover the cost

of running the restaurant .• Cost of land and building are fixed in miniature golf .• Miniature golf should be open for business only during those time of

the year when its exceeds its variable cost .


Problems of miniature golf• A miniature golf is not open in season time• Owner must keep in mind the distinction between fixed

cost and variable cost• These cost are sunk in the short run• Miniature golf cost are not fixed like land• Shutting down during season time would not reduce the

costs


• AlternativesThe owner shuts down the miniature golf at season time only if the revenue from the few player fails to cover the miniature golf variable cost


Comparison of miniature golfIn India it is not possible to have a miniature golf club because it is mostly prefer by high class society and they are mostly visited in weekends.People mostly in India do not prefer to play golf while in USA golf is majorly played and also it is considered as a status symbol among rich people.Miniature golf is mostly seen in five stars and seven starts hotel in India like J.W Mariott , Taj By Viventa Etc And That Are Much More Expensive Which Cannot Be Afford Much But In USA It Is Mostly Seen In The Restaurants And Café Of California, Las Vegas, San Francisco Etc.


Recommendation

Miniature golf should be open in lunch time in USA because more consumers come in restaurant while in India it is least seen

As it increase the variable cost it is most preferred by USA


ConclusionIn India miniature golf course should be closed in lunch time because people mostly spend their time in busy schedule and in USA it should be open in lunch time because it can generate revenue

THANK YOU

case study on Recession of 2008- 09 & real gdp recent history

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