Learning Objectives

After this lesson, students will be able to:

•explain what makes an economic downturn a

recession

•explain the difference between a depression and

a recession
 What is recession?
A. It is a phase of business cycle.
B. In recession total investment, Income, employment
and demand comes down.
C. This process become cumulative.
D. Production of goods and services is more but demand
is less, so price level also comes down.
E. It will further discourage investment and employment.
 What is business Cycle?
Business cycle (or trade cycle) refers to the fluctuation in
economic activity that occur in a more or less regular
time sequence in all capitalist societies (or market
economy)
 Phases of Business Cycle
A. Expansion or prosperity.
B. Recession.
C. Contraction or depression.
D. Revival or Recovery.
Phases of Business Cycle
 Recession in economic history
A. In USA – 1873, 1893, 1907, 1920-30’s and presently
felt this crisis.
B. 1995 – Tequila crisis in Mexico.
C. 1997-99 – Financial crisis of East Asia.
D. 1998 – Russian debacle.
E. India feel demand recession in 1966-67, 1974-76,
1982-83, 1991-93 and current economic slowdown.
 DEPRESSION/RECESSION – BREAKS PRIOR
CONCEPT OF ROBBINS ABOUT ECONOMICS

Robbins – Economics study human behaviour as a

relationship between ends and scarce means which have
alternative uses.

But in recession – resources are not scarce.

Demand side phenomenon of economics

(Recession) breaks supply side dominance (e.g.

Depression of 1930).

Keynes – In General Theory – produced a phenomenon of

effective demand.
 Keynes – General Theory of
effective demand
A. Lack of effective demand leads to economic crisis like
recession and depression.
B. It can be resolved by only effective demand.
C. To increase effective demand Keynes emphasized on
Govt. expending and interference in market economy.
D. The multiplier and accelerator effect of investment and
expending will further increase effective demand and
revive economy.
 Recession is different from
depression and slowdown
A. Economic activity after peak, start declining, is called
recession.
B. But in depression, economic activity start decreasing at
very large scale.
C. Slowdown means growth rate start decreasing but not in
negative trend.
D. So Indian economy is in more in slowdown mood than
recession.
E. American and western economy is affected by
recession.
 Current Scenario of Recession
A. It started from USA in 2007.
B. It originated from American mortgage crisis.
C. Then it spread in full American economy.
D. Banking, Auto, IT, Real Estate are the worst affected
sectors of this crisis.
E. Lehmann Bros., General Motors, got insolvent in this
crisis.
F. In global world now, no economic is decoupled from
this crisis.
G. World GDP and growth rate decreases drastically.
 Current Scenario of Recession
and India
A. India’s greatest partner of trade is Europe and America.
B. Both are worst affected in current economic turmoil.
C. Export sector worst hit by this crisis.
D. Textile, IT, Real Estate, Auto and Aviation sectors are
affected by this crisis.
E. India got affected by this turmoil in 2008.
F. Domestic demands helped to sustain this crisis to a
great extent in comparison with world economy.
 Indicators of Recession
A. Increase in stock of goods.
B. Stock market tumbling.
C. Decreasing price index.
D. Money supply increases but its demand is less in
credit market.
E. Downtrend growth rate.
F. Increasing unemployment.
G. Downturn in consumption.
 General causes of Recession
A. Over investment.
B. Purchasing power reduction of large community.
C. Shortage of essential input.
D. Lack of innovation.
E. Fall in credit and fiscal system.
F. Non-monetary causes like – strike, draught, war,
flood, etc..
G. Monetary causes.
H. Saturation in demand.
Preventive measures of Recession
A. Monetary and fiscal policy should be controlled,
flexible and coincide.
B. Avoiding undue increases in plant and equipment
etc..
C. Avoiding excessive inventory of raw materials and
finished products.
D. Avoid excessive sells, which result in cancellation.
E. Avoiding excessive credit flow in market that may
not be recovered leads to recession (e.g. American
mortgage crisis).
 Relief Measures of Recession
A. Extend public expending.
B. Try to increase income of lower and middle income
group.
C. Quick liquidation of inventory.
D. During recession need based product to be designed.
E. Reduction in manufacturing cost.
F. Improvement in quality to enhance demand.
G. Growth oriented monetary and credit policy.
H. Sales via loan.
I. Consumption oriented advertisement.
J. Moral boosting by Govt. laws and policy.