What is Economic Recession?

- Definition,
Causes & Effects
Chapter 10 / Lesson 12 Transcript

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Lesson Transcript
Instructor: Paul Mckinney

Paul has been in higher education for 17 years. He has a master's degree and is earning his
PhD in Community College Leadership.

A recession is a general downturn in any economy. A recession is associated with high

unemployment, slowing gross domestic product, and high inflation.

Economic Recession Definition

Economic recession is a period of general economic decline and is typically accompanied by
a drop in the stock market, an increase in unemployment, and a decline in the housing
market. Generally, a recession is less severe than a depression. The blame for a recession
generally falls on the federal leadership, often either the president himself, the head of the
Federal Reserve, or the entire administration.

Factors that Cause Recessions

High interest rates are a cause of recession because they limit liquidity, or the amount of
money available to invest.

Another factor is increased inflation. Inflation refers to a general rise in the prices of goods
and services over a period of time. As inflation increases, the percentage of goods and
services that can be purchased with the same amount of money decreases.

Reduced consumer confidence is another factor that can cause a recession. If consumers
believe the economy is bad, they are less likely to spend money. Consumer confidence is
psychological but can have a real impact on any economy.

Reduced real wages, another factor, refers to wages that have been adjusted for inflation.
Falling real wages means that a worker's paycheck is not keeping up with inflation. The
worker might be making the same amount of money, but his purchasing power has been
reduced.

Recessions and Gross Domestic Product

An economic recession is typically defined as a decline in gross domestic product (GDP)
for two or more consecutive quarters. GDP is the market value of all goods and services
produced within a country in a given period of time. An example of one type of GDP would
be the value of all the automobiles produced within the United States for one year. GDP only
takes into account new products that have been manufactured. Therefore, if a pre-owned car
lot were selling pre-owned cars, they would not be included in the GDP calculation.

The Great Recession of 2007-2008

Poor and irrational lending policies from the financial industry led many people to buy
houses they could not afford because everyone thought housing prices would continue to rise.
In 2006, the bubble burst as housing prices started to decline. An escalating foreclosure rate
caused panic, many banks and hedge funds who had bought mortgage-backed securities on
the secondary market suddenly realized they were facing huge loses. By August 2007, banks
became afraid to lend to each other because they did not want these toxic loans as collateral.
This led to the $700 billion bailout from the government to help save several large financial
institutions from bankruptcy. By December 2008, employment was declining faster than in
the 2001 recession, and the United States fell into a deep recession.

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Introduction to Macroeconomics: Help and Review

17 chapters | 173 lessons

1 - The Production Possibilities Curve: Help & Review

2 - Comparative Advantage, Specialization and Exchange:...
3 - Demand, Supply and Market Equilibrium: Help and Review
4 - Measuring the Economy: Help and Review
5 - Inflation Measurement and Adjustment: Help and Review
6 - Understanding Unemployment: Help and Review
7 - Aggregate Demand and Supply: Help and Review
8 - Macroeconomic Equilibrium: Help and Review
9 - Inflation and Unemployment: Help and Review
10 - Economic Growth and Productivity: Help and Review

 Economic Growth: How to Raise a Nation's Potential Output 8:09

 How Real GDP per Capita Affects the Standard of Living 9:19
 Productivity: The Economy's Long-Run Growth Engine 10:18
 Investment in Human Capital and Productivity 5:15
 Physical Capital: Definition and Effects on Productivity 6:18
 How Technology, Research & Development Affect Productivity 8:56
 Growth Policy and Economic Productivity 5:14
 Law of Diminishing Returns: Definition & Examples 5:53
 Normative Economic Statement: Definition & Example
  The Advance-Decline Line Chart: Definition & Uses
 Total Revenue in Economics: Definition & Formula 5:46
 What is Economic Recession? - Definition, Causes & Effects 4:07


Next Lesson

Surplus in Economics: Definition & Overview

 Go to Economic Growth and Productivity: Help and Review

11 - Money, Banking, and Financial Markets: Help and Review

 Types of Financial Assets: Money, Stocks & Bonds6:27

 Present and Future Value: Calculating the Time Value of Money17:04
 Measuring the Money Supply: Explanation and Examples5:20
 What is Money? - Definition and Types10:38
 The Four Basic Functions of Money5:38
 Fractional Reserve System: Required and Excess Reserves11:29
 How Money Is Made: Understanding Bank Lending in the Economy9:18
 Money and Multiplier Effect: Formula and Reserve Ratio12:55
 Money Demand and Interest Rates: Economics of Demand11:41
 The Money Market: Money Supply and Money Demand Curves6:24
 The 5 C's of Credit
 What Are Commercial Banks? - Definition, Roles & Functions3:20
 The Circular Flow of Income: Definition & Model4:29
 The Functions and Characteristics of Money5:05
 What is the Gold Standard? - Definition & History
 What is the Dow Jones Industrial Average? - History & Performance
 Currencies of the World
 Go to Money, Banking, and Financial Markets: Help and Review

12 - Central Bank and the Money Supply: Help and Review

13 - Fiscal and Monetary Policies: Help and Review
14 - Foreign Exchange and the Balance of Payments: Help...
15 - Inflows, Outflows, and Restrictions: Help and Review
16 - Government & the Economy: Help and Review
17 - The U.S. Economic System

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