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Author: DivyaVeerabhadra
Producer Price
Consumer Price
What is Recession?
Recession is the economy shrinking for two consecutive quarters (=6 months) with a decrease in the GDP (=Gross Domestic Product)
GDP = Value of all the reported goods and services produced by the people operating in the country GDP = MONEY VALUE OF {C + I + G + (X M)}
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;
There is a joke that economists quote to explain the Difference between Recession & Depression
RECESSION
What goes up; Has to come Growing economy has to come down if the production down; rate of goods & services was more than the actual consumption;
OVER PRODUCTION
PSEUDO DEMAND ACTUAL NEED WAS NOT THERE; WRONG PROJECTIONS
A situation in which the supply exceeds the nations ability to consume what has been produced;
Supply > Demand
LOW
Word of mouth
Assignable Cause
Consumers are fearing that they may lose their jobs; So, they have less confidence to spend money and buy goods; This will result in reduction in demand in the market; Consumers start saving money instead of spending money; This is a downward spiral in the economy;
Producers do not stock materials, they reduce their productions, gets into the cost reduction activities, worried about the profitability, etc
But, still, no improvement in occupancy rate Airline & Hotel Industries started Cost Reduction activities
CONTINUED IN NEXT SLIDE
ii] Lay off people Low or No income to spend and buy goods
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 & producers drastically comes down;
People buying less stuff Decrease in factory production Growing unemployment Slump in personal income An unhealthy stock market
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
Hence, Government does not have direct control on Producers & the Consumers behavior; But, they can influence millions of Producers & Consumers with Governments policies;
Fiscal Policies
(By Govt.)
Monetary Policies
(By RBI)
Government influences the economy by changing how it (Government) spends and collects money
Fiscal Policies
1] Tax cuts for businesses or for individuals 2] More Spending by Govt. to create jobs
Government influences the economy by changing how it (Government) spends and collects money More money available for spending Individuals get salary and spend money
Monetary Policies
1] Reduce reserve ratio
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
Monetary Policies
Monetary Policies
1] Reduce reserve ratio
Government manipulates the available supply of money in the country More money available for bank to give loans Individuals take more loan It becomes an income to Govt. to inject money into the market Demand picks up; Market can recover;
2] Lower the interest rates 3] Use its own reserved money to buy Govt. bonds
WOW!!!!!!!!
RBIs Power or Governments Power is double-edged sword; Sometimes, their policies to recover from recession can be counter-productive and it may further worsen the situation;
If we advise our people to save money, then, the multiplication effect is that the 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 the country stops spending, what will happen?
GDP Growth Rate Down; But, Still expected to be Around 6% in India GDP Growth Rate Negative;
Currently, in Recession
HOPING THIS TIME RECESSION VANISHES SOON SO THAT INDIA GETS BACK TO ITS STRONGER GDP GROWTH RATE OF 8% TO 10% (THOUGH THE EXPERSTS SAY IT WILL LAST TILL Q3 OF 2009)