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Before, understanding Recession,

we need to understand the market


economy;
A] TWO STAGES OF MARKET ECONOMY

B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

A] TWO STAGES OF MARKET ECONOMY

A1] Growing Market Economy

A2] Declining Market Economy

A1] Growing Market Economy

Starting Point = Willingness to buy

A2] Declining Market Economy


Starting Point = Unwillingness to buy

B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

Producer wants his demand always to be high


Consumer wants his buying cost always to be low
Actually, Demand is the price at which
consumer is ready to buy and
producer is ready to sell;

Producer Price
Consumer Price

Usually, we think;
Demand = Quantity
But, here Demand = Price;
This is because,
Price decides the Quantity of Sales;
Competitive Price = More Demand;
In competitive Price = Less Demand;

C] 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)}
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;

There is a joke that economists quote to explain the


Difference between Recession & Depression

RECESSION
= WHEN YOUR NEIGHBOR LOSES HIS JOB

DEPRESSION
= WHEN YOU LOSE YOUR JOB

D] What is a Business Cycle?

What goes up; Has to come


down;

Growing economy has to


come down if the
production
rate of goods & services was
more than the actual
consumption;

E] Why Recession happens?

E1] OVER
PRODUCTION

E2] LOW
CONFIDENCE
LEVEL

E] Why Recession happens?

E1] OVER
PRODUCTION
PSEUDO DEMAND
ACTUAL NEED WAS
NOT THERE;
WRONG PROJECTIONS

COMPANIES
PRODUCED
MORE

A situation in which the


supply exceeds the nations
ability to consume what has
been produced;
Supply > Demand

E] Why Recession happens?


E2] LOW
CONFIDENCE
LEVEL

E2.1] Word of mouth


E2.2] Assignable Cause

E2.1] Word of mouth


Low Confidence Level
of Millions of
consumers and
producers after they
hear 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 reduction
in demand in the market; Consumers
start saving money instead of spending
money; This is a downward spiral in
the economy;

E] Why Recession happens?


E2] LOW
CONFIDENCE
LEVEL

E2.1] Word of mouth


E2.2] Assignable Cause

E2.1] Word of mouth


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

Consumers
arenot
fearing
they may
Producers do
stockthat
materials,
they
lose
theirtheir
jobs;
So, they have
reduce
productions,
getsless
into the
confidence
to spend
money
and buy
cost reduction
activities,
worried
about
goods;
This will result
the profitability,
etcin reduction
in demand in the market; Consumers
start saving money instead of spending
money; This is a downward spiral in
the economy;

E] Why Recession happens?


E2.2] Assignable Cause

Bad Incidences Happening;


Example: September 11 Terrorist Attack in US;
International Airport block in Thailand;
Mumbai Attacked in India;
etc
Series of such incidences
leading 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


Resulted in low occupancy rates
Airlines & Hotel Industries badly hit
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


Airline & Hotel Industries started
Cost Reduction activities

i] Reduce No. of flights

ii] Lay off people

iii] Salary reduction to


Not laid off people

In flight meals reduced

Low or No income to
spend and buy goods

They became careful due


to the fear of loss of job

Meals supplying company


got the hit

Demand for other goods


come down

Started saving money


instead of spending

Catering company now,


lays off people

Demand for other goods


come down

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;

F] How to know recession?

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

G] How to come out of 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;

Consumers;

Can produce and


sell at their prices

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?


Hence, Government does not have direct control on Producers & the
Consumers behavior; But, they can influence millions of Producers &
Consumers with Governments policies;

Government has 2 plans


Fiscal Policies

Monetary Policies

(By Govt.)

(By RBI)

Government influences the


economy by changing how
it (Government) spends
and collects money

RBI manipulates
the available supply of
money in the country

G] How to come out of recession?


Fiscal
Policies

Government influences the economy by changing


how it (Government) spends and collects money

1] Tax cuts for


businesses or
for individuals

More money
available for
spending

2] More Spending
by Govt. to
create jobs

Individuals get
salary and spend
money

3] Automatic
fiscal policy;
Unemployment
Insurance

Some income to
unemployed
people to spend

Demand picks
up; Market
can recover;

G] How to come out of recession?


Monetary
Policies

Government manipulates the available supply


of money in the country

1] Reduce reserve
ratio

More money
available for bank
to give loans

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

Demand picks
up; Market
can recover;

G] How to come out of recession?


Monetary
Policies

Government manipulates the available supply


of money in the country

1] Reduce reserve
ratio

More money
available for bank
to give loans

2] Lower the
interest rates

Individuals take
more loan

Demand picks
up; Market
can recover;

G] How to come out of recession?


Monetary
Policies

Government manipulates the available supply


of money in the country

1] Reduce reserve
ratio

More money
available for bank
to give loans

2] Lower the
interest rates

Individuals take
more loan

3] Use its own


reserved
money to buy
Govt. bonds

It becomes an
income to Govt.
to inject money
into the market

Demand picks
up; Market
can recover;

I] 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?

Nations recession is controlled by the actions of


everybody living
in that country;

I] WOW!!!!!!!!
Most of the
developing
Economies like China,
India;

Currently,
Slow Down
Stage; Not yet
in Recession

GDP Growth
Rate Down; But,
Still expected to be
Around 6% in India

Most of the developed


Economies like US,
Japan, Germany, etc

Currently,
in Recession

GDP Growth
Rate Negative;

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)