Recession Explained indepth

Before, understanding “Recession”, we need to understand the marketeconomy;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 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;

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


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


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


Low Confidence Level of Millions of consumers and producers after theyhear many job cuts, Demand coming down,Companies’ bankruptcy,etc


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


E2.1] Word of mouth


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;



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 peopleiii] Salary reduction to“Not laid off people”

In flight meals reducedLow 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



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


1] Reduce reserve ratio

More moneyavailable for bankto give loans


Government manipulates the available supply of money in the country

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”





2] Lower the interest rates

Individuals takemore loan


MonetaryPolicies





3] Use its own reserved money to buy Govt. bonds

It becomes anincome to Govt.to inject moneyinto the market


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 developingEconomies 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)

Recession Explained indepth

Business

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