What is a Recession?
In classic economic terms, a recession is two consecutive quarters (3-month periods) of a contraction of Gross Domestic Product (GDP).
In a general sense, a recession is overall shrinkage of economic activity. People don't necessarily feel in a recession because of a technical statistic of GDP measurement, but more on daily insecurity about their job, reduced ability to make purchases, and decisions to "do less," such as skip a vacation. Households have less discretionary income.
A shrinking GDP correlates with an increase of unemployment. Recession tends to work in a circle. People spend less, companies therefore have reduced revenue, companies lay people off, therefore there is less cash coming into households, who continue to spend less. If this kept going, more people would lose their jobs still.
There is no simple reason why recessions happen. Many economists theorize that recessions are part of the a href="../glossary.php">business cycle, or that a recession will happen sooner or later as a reaction to a period of heated economic activity. Recessions are not wanted, but can be expected. Others point out that a recession can occur because of influences outside of our economy such as a rise in the price of oil based on decisions of foreign countries. It is wise to have saved for these hard times.
The government will intervene to move the country out of a recession. The overall goal is to increase the flow of money. This can be accomplished in a number of ways. The best known approach is when the Fed reduces interest rates. The effect of this is that banks being able to get cash at a cheaper rate from the government will in turn lower the interest rates they charge businesses to borrow. Then businesses are more willing to invest in research and development, advertising, or whatever else is to their advantage. Business activity expands, and workers are hired back. The unemployment rate falls, and more people now have money to spend. As household spending increases, the overall measure of the economy increases till it eventually is reversed into a positive trend.
Another approach the government can take is to lower taxes and/or provide a rebate back to families. In recent times President George W. Bush initiated sending money to households in the anticipation that they would spend it. Some spent the extra money on new things, others paid off debt, and others just saved the money. In other words not all the received money was spent in a way that new economic activity would occur. Under President Barack Obama a variation on this has been taken that instead of sending a lump sum to a family, a little bit is added regularly to worker's paychecks. The reasoning is that an extra amount of "pocket money" is more likely to be spent with less thought than what to do when a family receives a large amount of several hundred dollars.
Recessions are often underway before they are officially recognized and the reversal can also be felt in fits and starts. Even though sound mathematical measures of the economy show an upswing, households are slower to respond since it is the feeling of security and that things are better that prompt people to spend.
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In a general sense, a recession is overall shrinkage of economic activity. People don't necessarily feel in a recession because of a technical statistic of GDP measurement, but more on daily insecurity about their job, reduced ability to make purchases, and decisions to "do less," such as skip a vacation. Households have less discretionary income.
A shrinking GDP correlates with an increase of unemployment. Recession tends to work in a circle. People spend less, companies therefore have reduced revenue, companies lay people off, therefore there is less cash coming into households, who continue to spend less. If this kept going, more people would lose their jobs still.
There is no simple reason why recessions happen. Many economists theorize that recessions are part of the a href="../glossary.php">business cycle, or that a recession will happen sooner or later as a reaction to a period of heated economic activity. Recessions are not wanted, but can be expected. Others point out that a recession can occur because of influences outside of our economy such as a rise in the price of oil based on decisions of foreign countries. It is wise to have saved for these hard times.
The government will intervene to move the country out of a recession. The overall goal is to increase the flow of money. This can be accomplished in a number of ways. The best known approach is when the Fed reduces interest rates. The effect of this is that banks being able to get cash at a cheaper rate from the government will in turn lower the interest rates they charge businesses to borrow. Then businesses are more willing to invest in research and development, advertising, or whatever else is to their advantage. Business activity expands, and workers are hired back. The unemployment rate falls, and more people now have money to spend. As household spending increases, the overall measure of the economy increases till it eventually is reversed into a positive trend.
Another approach the government can take is to lower taxes and/or provide a rebate back to families. In recent times President George W. Bush initiated sending money to households in the anticipation that they would spend it. Some spent the extra money on new things, others paid off debt, and others just saved the money. In other words not all the received money was spent in a way that new economic activity would occur. Under President Barack Obama a variation on this has been taken that instead of sending a lump sum to a family, a little bit is added regularly to worker's paychecks. The reasoning is that an extra amount of "pocket money" is more likely to be spent with less thought than what to do when a family receives a large amount of several hundred dollars.
Recessions are often underway before they are officially recognized and the reversal can also be felt in fits and starts. Even though sound mathematical measures of the economy show an upswing, households are slower to respond since it is the feeling of security and that things are better that prompt people to spend.
Read more: