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Causes of Economic Recession

Gaynor Borade Jan 23, 2019
When a nation's calculated gross domestic product is affected negatively on account of decline in the economic activities, the situation is described as an economic recession.
The calculation of a country's gross domestic product or GDP is usually for two or more successive quarters of a year. Many economists judge recessions to better understand the causes and find effective solutions to them. This period is emblematic of significant decline in economic activity. The decline could be observed over a period of a few months.
The abstract decline that affects real people is sensed via a fall in the GDP, actual income on record, employment data, production and sales, etc. It is measured from the time of initial decline, which is mostly just after the economy reaches a peak of activity, till the time the resultant 'trough' shows up on the graph. Most of them are brief.

Wider Implications

A recession documents simultaneous decline in employment, profit and investment, and an upscale inflation. During the economic collapse, the periods of deflation and alternative inflation called 'stagflation' are also witnessed. A severe economic recession is a devastating breakdown of an economy.
Those economies that are market-oriented are usually characterized by economic driving cycles and there it is debated whether or not, in such economies, government intervention smooths, exaggerates, or creates it. This period witnesses a stock market drop at the onset.
Sometimes, nearly half of the stock market declines are recorded after the onset of this period. It can also be sensed via the unemployment rate and subsequent claims, a housing recession, and the use of the indicator index.

Possible Solutions

There are a number of strategies that can be implemented to help an economy move out of recession. The strategy adopted and applied varies and depends on the type of economic system and the analysis followed by the country's policy makers.
While some may advocate the deficit spending to initiate economic growth, others may adopt tax cuts and yet some other may recommend non-intervention by the government. There is no difference between the deficit spending and tax cut strategies and both increase the money within the economy.
Recessions are believed to be caused by wide based increase in rates of interest or a loss of consumer confidence. Economists suggest that such periods are actually caused by specific events that impact certain industries.

Factors that Impact Economic Recession

Periods of recession have followed dramatic increases in the price of oil. The industries that depended on energy prices suffered a sharp decrease in business and subsequently, reduced output and staff.
An economy-wide decline in demand is influenced greatly by the higher cost of oil imports and a stringent monetary policy. The influencing factors slow down overall demand and lead to subsequent recessions. It is the outcome of the impact on the economy by drop in demand, role of the aggregate, and the allocation forces.

Reversing the Situation

Economists believe, backed by years of research, that paying attention to the forces that impact reallocation may actually help us to predict future recessions and upscale the economy.
The technology harnessed today and the survival post 1929-1930 has made it possible for economists to observe and make solutions available if and when such an unfortunate event affects an economy. It has a disproportionate impact on firms that trade with the country or zone and this triggers reallocation.
The advent of the Internet connectivity and the use of wireless technology to redefine communication and information and similar sources of favorable reallocation, could prevent an economic recession. The relative strength of the determining forces set the future course of the business cycle and thus, helps to evade the impending recession.
The causes are many, but the solutions available today are just as much. It is in a deeper understanding of the implications that we stand to keep the situation at bay.