PROJECT WORK

Made by :

AMOL BHARGAVA 09/89242 B COM(H) IIIrd year

DYAL SINGH COLLEGE

(Lodhi Road, New Delhi-110003)

PROJECT ON RECCESSION
Submitted in partial fulfillment of the requirement of Paper No. XXXVII B COM (H) part III Examination (2009 2012) Submitted by : Amol Bhargava B com (H) 3rd yr. 09/89242 Project Mentor : Mr. Vikas Sharma Department of commerce

DECLARATION
This is to certify that the present project report is the outcome of my own efforts and my indebtedness to other publications has been duly acknowledged at the relevant places. It has not been submitted in part or full for any other diploma or degree of any university. I have taken proper care and shown utmost sincerity in completion of this project. This project is prepared in accordance with the guidelines issued by University of Delhi.

Mr. Vikas Sharma (Project Mentor)

Amol Bhargava (students name)

ACKNOWLEDGEMENT
This project has been made possible through direct and indirect support of various people from whom I wish to express my appreciation and gratitude. I would like to thank DELHI UNIVERSITY for giving me an opportunity to work on a valuable project. I owe my sincere thanks to Mr. Vikas Sharma and other faculty members for constantly guiding me and tackling variety of hurdles with implicit patience throughout my project.

Amol Bhargava B COM (H) 3RD YEAR 09/89242 DYAL SINGH COLLEGE

CONTENTS
Sr.No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 PARTICULARS OBJECTIVES CONCEPT DEFINITIONS SHAPES OF RECESSION CAUSES OF RECESSION IMPACT OF RECESSION BENEFITS OF RECESSION OVERCOMING RECESSION THE PROBLEMS FACED IN RECOVERING RECESSION THE ENTIRE STORY OF RECENT US RECESSION IMPACT OF RECESSION ON GLOBAL ECONOMY IMPACT OF RECESSION ON ASIA SUGGESTION BIBLIOGRAPHY 24 34 36 22 17 PAGE NO. 2 4 5 6 9 11 13 14 15

CONCEPT OF RECESSION
In economics, a recession is a business cycle contraction, a general slowdown in economic activity over a period of time During
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recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household incomes, business profits and inflation all fall during recessions; while bankruptcies and the unemployment rate rise. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation. During recession interest rates usually fall in during these months to stimulate the economy by offering cheap rates at which to borrow money. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP); although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession. The NBER defines a recession as a significant decline in economic activity lasting more than a few months. Recession is a normal (albeit unpleasant) part of the business cycle; however, one-time crisis events can often trigger the onset of a recession. The global recession brings a great amount of attention to the risky investment strategies used by many large financial institutions, along with the truly global nature of the financial system. As a result of
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such a wide-spread global recession, the economies of virtually all the world's developed and developing nations suffer extreme set-backs and numerous government policies are implemented to help prevent a similar future financial crisis. A recession is defined simply as a period when GDP falls i.e., negative real economic growth for at least two quarters. Some economists prefer a definition of a 1.5% rise in unemployment within 12 months. While economic recessions are foreseeable, they generally are not detected until already in motion. Recession (or contraction) is a natural result of the economic cycle and will adjust for changes in consumer spending and consumption or increasing and decreasing prices of goods and labor.Rarely though entirely possible, experiencing a multitude of these negative factors simultaneously can lead to a deep recession or even long economic depression.

DEFINITIONS
1. The Newspaper Definition:

The standard newspaper definition of a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters. 2. The BCDC Definition: The Business Cycle Dating Committee defines a recession as the time when business activity has reached its peak and starts to fall until the time when business activity bottoms out. When the business activity starts to rise again it is called an expansionary period. By this definition, the average recession lasts about a year. 3. The general definition: Recession is a period of general economic decline; typically defined as a decline in GDP for two or more consecutive quarters. A recession is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market. A recession is generally considered less severe than a depression, and if a recession continues long enough it is often then classified as a depression. There is no one obvious cause of a recession, although overall blame generally falls on the federal leadership, often either the President himself, the head of the Federal Reserve, or the entire administration.
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RECESSION SHAPES
Recession shapes are used by economists to describe different types of recessions. V-shaped recession:

Source: Bureau of Economic Analysis In a V-shaped recession, the economy suffers a sharp but brief period of economic decline with a clearly defined trough, followed by a strong recovery. E.g.: Recession of 1953 in the United States U-shaped recession

Source: Bureau of Economic Analysis

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A U-shaped recession is longer than a V-shaped recession, and has a less-clearly defined trough. GDP may shrink for several quarters, and only slowly return to trend growth. E.g.: The 197375 recession W-shaped recession

Source: Bureau of Economic Analysis A W-shaped recession or "double dip" recession, occurs when the economy has a recession, emerges from the recession with a short period of growth, but quickly falls back into recession. E.g.: The Early 1980s recession in the United States. L-shaped recession

Source: Penn World Tables

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An L-shaped recession occurs when an economy has a severe recession and does not return to trend line growth for many years, if ever. This is the most severe of the different shapes of recession
E.g.: recession occurred in Japan following the bursting of the Japanese asset price bubble in 1990.

CAUSES OF ECONOMIC RECESSION

An economic recession is primarily attributed to the actions taken to control the money supply in an economy. The Federal Reserve is the agency responsible for maintaining the delicate balance between money supply, interest rates, and inflation. When this delicate balance is tipped, the economy is forced to correct itself. The Federal sometimes deals with these situations by dumping huge amounts of money supply into the money market. This helps to keep interest rates low, even as inflation rises. Inflation is the rise in the prices of goods and services over a period of time. So, if inflation is increasing, it means that goods and services are costing more now than they did before. The higher the level of inflation, the smaller the percentage of goods and services is which can be bought with a certain amount of money. There can be many contributing factors for inflation, which include but are not limited to increased costs of production, higher costs of energy, and/or the national debt.

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In an environment where inflation is prevalent, people tend to cut out things like leisure spending. They also budget more, spend less on things they usually indulge in, and start saving more money than they did. As people and businesses start finding ways to cut costs and derail unneeded expenditures, the GDP begins to decline. Then, unemployment rates will rise because companies start laying off workers to cut more costs, because consumers are not spending like they were. It is these combined factors that manage to drive the economy into a state of recession. This set of circumstances, coupled with the ability of people to get access to greater amounts of loan money due to extremely lax loan practices, creates a cycle of unsustainable economic activity that will eventually grind an economy to a near halted existence. You could also say that a recession is actually caused by factors that might stunt the growth that is available from the short term benefits to an economy that can be brought about by such things like spiking oil prices or even war. And while these are very short term in nature usually, they have been known to correct themselves quicker than the full blown recessions that have happened in the past.

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THE IMPACT OF A RECESSION

The impact of a recession also depends on various factors such as:

How long the Recession Lasts: An important factor is how long and how deep the recession is. One of the notable features of the Great Depression was how long the mass unemployment existed. More recent recessions have been shorter in duration.

Distribution of the adverse effects: The impact of a recession is not equally distributed throughout the economy. A recession will usually affect some sectors much more than others.

ILL-EFFECTS OF RECESSION
Recession is decelerated phase where everything goes downhill and everything goes berserk. To reconcile, recession means decline, downturn, collapse or depression, in common understanding.
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It signifies a fall in real GDP, lower national income and lower national output. Recession has negative impact on economic growth and makes unconstructive impact on the nation. Recession leads to impulsive rise in unemployment and it can be viewed in every sector and industry. The problem of unemployment in India is deep-rooted and it intensified to extra quarters, in phases of recession. In recession phase, government is always pressurized to large extent as it comes like an unwanted bad news for them. It results into lower tax revenues because of lower income tax and lower corporation tax revenues. Government is expected to spend higher for unemployment benefits and so it lead to higher borrowing to make both ends meet. Recession makes a resounding impact on share markets and so it affects share prices to great extent.It makes share market look shaky and shareholders often face disappointment. Many a times shares fall sharp as an anticipation of predictable financial disaster, arising out from the fear of recession. A recession will reduce the appropriate demand and correspondingly will enforce pressure on the prices and will rage out price-war in the market. To retain consumers, the price-wars may lead to decline in rates and so it might results into lower inflation rates. Due to recession phase, the investor always feels finicky and shaky to invest as the fear of acquiring substantial profits increases manifold. The
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investment in the market becomes more unstable and it affects the economic growth. It leads to lowering of economic growth and simultaneously other related aspects of it.

BENEFITS OF RECESSION
Now this comes as a very interesting question, can the dreaded R-word be beneficial to anyone??? Some great philosopher has said, There is always a greener side to every picture... this is apt in case of recession. But to ones surprise Recession, too, is beneficial to some, namely, Lower interest rates are good for borrowers Lower inflation rates are good for savers Sometimes difficult times can force us to re-evaluate our financial situation. It can make us look for new business avenues and new ways to cut costs and spending. Although it may be temporarily unpleasant, the important thing is not to panic but try to make the best of any situation we find ourselves in.

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OVERCOMING RECESSION
On the basis of recovery, recession can be classified into two types: 1. The garden variety recession starts when the economy is growing at a faster rate than the central bank thinks it should. Recovery from the garden variety recession is straightforward. The central bank, which created the slowdown by adjusting short-term interest rates upward, moves them back down again and the economy gradually picks up speed. 2. The less frequent, but deeper and longer, recessions may have all of the elements of the garden variety business cycle type, including the
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central banks raising rates to attempt to fight inflation. But the real defining characteristic of the deeper recessions is what economists have called an exogenous event, or an external shock. Recovery from deeper recessions is also straightforwardelimination of the causes of the economic slowdown. But its harder to accomplish, and takes longer to achieve, because it involves structural adjustment to a new set of economic realities.

THE PROBLEMS FACED IN RECOVERING RECESSION

Recession can be overcome by the adoption of the following strategies: 1) Development of new markets: The rural market gives immense opportunity to enter into this segment. The strength of the areas should be identified and accordingly the market should be penetrated. This helps the company to generate business at a faster pace and also leads to better sales.
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2) Cash flow must be improved: The credit period of the traders must be strictly reduced, so that they pay on time and also demand should be created to compel the distributers to pay on time. This will reduce the dependency on the borrowings from the bank and also improve the liquidity crunch. Thereby the inventory level at distribution level reduced. 3) Emphasis on promotion of the product: The companies must promote the product to key customers .The key customers must be serviced properly and their sales closely monitored. This can helps the company to generate additional growth which can be was utilized to some extent in promoting the product.

4) Focus on training: People from different arenas can be trained at different locations and levels. Sales must be discussed and also up gradation of skills must be paid attention to. This motivates people to sell more. 5) Improve employee engagement through communication: Information must be given to the people on regular basis on their performances. This awareness helps the employee to work better. The
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employee engagement through communication is an important tool in making the people to work harder. 6) Introduction of new products: New products can be a lifeline in recession. This helps the company to enter into new therapeutic segments. Thus introduction of newer products can bring growth. This can be done in the following ways:
1. Encourage exports 2. Provide Accessible Credit for Business 3. Improve Tax Collection 4. Set Aside Large Amount for Social Welfare 5. Control Expenditures in Other Fields 6. Improve Tourism Sector

THE STORY OF U.S RECESSION

In US, a boom in the housing sector was driving the economy to a new level. A combination of low interest rates and large inflows of foreign funds helped to create easy credit conditions where it became quite easy for people to take home loans. As more and more people took home
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loans, the demands for property increased and fueled the home prices further. As there was enough money to lend to potential borrowers, the loan agencies started to widen their loan disbursement reach and relaxed the loan conditions. Since it was a good time and property prices were soaring, the only aim of most lending institutions and mortgage firms was to give loans to as many potential customers as possible. The practice of checking the customers repaying capacity was ignored in many cases. As a result, many people with low income & bad credit history or those who come under the NINJA (No Income, No Job, and No Assets) category were given housing loans in disregard to all principles of financial prudence. Many homeowners used the increased property value to refinance their homes with lower interest rates and take out second mortgages against the added value. Bubble that burst However, as the saying goes, No boom lasts forever, the housing bubble was to burst eventually. Overbuilding of houses during the boom period finally led to a surplus inventory of homes, causing home prices to decline beginning from the summer of 2006. Once housing prices started depreciating in many parts of the U.S., refinancing became more difficult. In the US, an estimated 8.8 million homeowners nearly 10.8% of total homeowners had zero or negative equity as of March 2008, meaning their homes are worth less than their mortgage. This
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provided an incentive to walk away from the home than to pay the mortgage. During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity. Increasing foreclosure rates and unwillingness of many homeowners to sell their homes at reduced market prices significantly increased the supply of housing inventory available. Sales volume of new homes dropped by 26.4% in 2007 as compare to 2006. Further, a record nearly four million unsold existing homes were for sale including nearly 2.9 million that were vacant. This excess supply of home inventory placed significant downward pressure on prices. As prices declined, more homeowners were at risk of default and foreclosure.

This is how matter complicated

Unfortunately, this problem was not as straightforward as it appears. For original lenders these subprime loans were very lucrative part of their investment portfolio as they were expected to yield a very high return in
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view of the increasing home prices. Since, the interest rate charged on subprime loans was about 2%, lenders were confidant that they would get a handsome return on their investment. With stock markets booming and the system flush with liquidity, many big fund investors like hedge funds and mutual funds bought such portfolios from the original lenders. The subprime loan market thus became a fast growing segment. Major (American and European) investment banks and institutions heavily bought these loans to diversify their investment portfolios. Most of these loans were brought as parts of CDOs (Collateralized Debt Obligations). CDOs are just like mutual funds with two significant differences. First unlike mutual funds, in CDOs all investors do not assume the risk equally and each participatory group has different risk profiles. Secondly, in contrast to mutual funds which normally buy shares and bonds, CDOs usually buy securities that are backed by loans (just like the MBS of subprime loans.) Owing to heavy buying of Mortgage Backed Securities (MBS) of subprime loans by major American and European Banks, the problem, propagated into the words financial markets. As the home prices started declining in the US, sub-prime borrowers found themselves in a messy situation. Their house prices were decreasing and the loan interest on these houses was soaring. As they could not manage a second mortgage on their home, it became very difficult for them to pay the higher interest rate. As a result many of
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them opted to default on their home loans and vacated the house. However, as the home prices were falling rapidly, the lending companies, which were hoping to sell them and recover the loan amount, found them in a situation where loan amount exceeded the total cost of the house. Eventually, there remained no option but to write off losses on these loans. The problem got worsened as the MBS lost their value. Falling prices of CDOs dented banks investment portfolios and these losses destroyed banks capital. The complexity of these instruments and their wide spread to major International banks created a situation where no one was too sure either about how big these losses were or which banks had been hit the hardest. Mayhem in the banks. Global banks and brokerages have had to write off an estimated $512 billion in subprime losses so far, with the largest hits taken by Citigroup ($55.1 billion) and Merrill Lynch ($52.2 billion). A little over half of these losses, or $260 billion, have been suffered by US-based firms, $227 billion by European firms and a relatively modest $24 billion by Asian ones. Despite efforts by the US Federal Reserve to offer some financial assistance to the beleaguered financial sector, it has led to the collapse of Bear Sterns. Bear Sterns was bought out by JP Morgan Chase with some help from the US Federal .The crisis has also seen Lehman Brothers file
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for bankruptcy. Merrill Lynch has been bought out by Bank of America. Freddie Mac and Fannie Mae, two giant mortgage companies of US, have effectively been nationalized to prevent them from going under. Reports suggest that insurance major AIG (American Insurance Group) is also under severe pressure and has so far taken over $82.9 billion so far to tide over the crisis. From this point, a chain reaction of panic started. Since banks and other financial institutes are like backbone for other major industries and provide them with investment capital and loans, a loss in the net capital of banks meant a serious detriment in their capacity to disburse loans for various businesses and industries. This presented a serious cash crunch situation for companies who needed cash for performing their business activities. Now it became extremely difficult for them to raise money from banks. What is worse is the fact that the losses suffered by banks in the subprime mess have directly affected their money market the world over.

EFFECT OF RECESSION ON GLOBAL ECONOMY

The continuing development of the crisis has prompted in some quarters fears of a global collapse. The financial crisis yielded the biggest banking shakeout since the savings-and-loan meltdown. The United Kingdom had started systemic injection, and the world's central banks were now cutting interest rates. UBS quantified their expected recession
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durations on October 16: the Euro zones would last two quarters, the United States' would last three quarters, and the United Kingdom's would last four quarters. The Brookings Institution reported in June 2009 that U.S. consumption accounted for more than a third of the growth in global consumption between 2000 and 2007. With a recession in the U.S. and the increased savings rate of U.S. consumers, declines in growth elsewhere have been dramatic. For the first quarter of 2009, the annualized rate of decline in GDP was 14.4% in Germany, 15.2% in Japan, 7.4% in the UK, 18% in Latvia, 9.8% in the Euro area and 21.5% for Mexico. Some developing countries that had seen strong economic growth saw significant slowdowns. For example, growth forecasts in Cambodia show a fall from more than 10% in 2007 to close to zero in 2009, and Kenya may achieve only 3-4% growth in 2009, down from 7% in 2007. According to the research by the Overseas Development Institute, reductions in growth can be attributed to falls in trade, commodity prices, investment and remittances sent from migrant workers .This has stark implications and has led to a dramatic rise in the number of households living below the poverty line, be it 300,000 in Bangladesh or 230,000 in Ghana. By March 2009, the Arab world had lost $3 trillion due to the crisis. In April 2009, unemployment in the Arab world is said to be a 'time bomb'. In May 2009, the United Nations reported a drop in foreign investment
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in Middle-Eastern economies due to a slower rise in demand for oil. In June 2009, the World Bank predicted a tough year for Arab states.

EFFECT ON ASIAN ECONOMY

While beginning in the United States the late 2000s recession spread to Asia rapidly and has affected much of the region. Asias financial sector in 2009 was relatively better compared to other emerging economies. The five critical areas of risk for Asias financial markets:
1. Asset markets witnessed corrections 2. Government debt continued to grow 3. External debt remained a risk 4. Easing external balances 5. Strains in credit access and the banking sector

THE OUTLOOK OF VARIOUS SECTIONS OF ASIA

1. Mainland China In China, the GDP growth for 2008 was 9.7% and dropped to 8.5% in 2009. A struggle was underway to see who would swallow the losses on
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US Agencies and Treasuries. In November, China announced a package of capital spending where four trillion Yuan ($586 billion) was spent on upgrading infrastructure. 2. Hong Kong The Hong Kong economy officially slid into recession in the final quarter of 2008. Hong Kong is an economy built on services, retail, tourism, transport and financial industries. The Hang Seng Index lost over 60% of its value, property market lost over 40% in value and unemployment is at a record high of 4.8%. 3. Japan In Japan exports in June declined for the first time in about five years falling by 1.7%. Exports to the United States and European Union fell 15.4% and 11.2% respectively. The decline in exports and increase in imports cut Japan's trade surplus $1.28 billion a decline of 90% from the previous year.

4. Malaysia In January 2009, Malaysia has banned the hiring of foreign workers in factories, stores and restaurants to protect its citizens from mass unemployment amid the global economic crisis. 5. Singapore
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Singapore's economy saw its biggest drop in five years, falling by 6.6%; however, the Managing Director of Singapore's central bank said a technical recession was not likely.Singapore cut its 2008 GDP forecast to between 4 and 5 from 4 to 6%before and then again down to 3%. 6. India India's economy benefited from recent high economic growth which declined greatly due to the global economic crisis. Economic growth in India during FY2008-09 stood at 6.7%.The global crisis had less impact of India because exports account for only 15% of India's GDP, less than half the levels of major Asian economic powers such as China and Japan. Though he ended up being wrong, the former Indian Finance Minister P. Chidambaram once boasted that he expected India's economy to "bounce back" to 9% during FY2009. India's Prime Minister Manmohan Singh said that the government will take measures to ensure that the economic growth bounces back to 9%.The Asian Development Bank predicted India to recover from weakening momentum in 4-6 quarters.

7. Pakistan In Pakistan the central bank's foreign currency reserves is as little as $3 billion, sufficient for a single month of imports. Corruption and mismanagement have combined with high oil prices to damage
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Pakistan's economy. Pakistan's rupee has lost more than 21 per cent of its value in 2008 and inflation is at 25 per cent. President Asif Ali Zardari claimed Pakistan needed a bailout worth $100 billion which he was expected to ask for at a meeting in Abu Dhabi in November.

CONCLUSION AND MY SUGGESTION

After understanding the dreaded R-word in depth many facets of recession unfolded. We understood that recession is something that cannot be promptly avoided as it is a part of the business cycle.

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However, we list below some of the suggestions that we have come up with

1) Encourage exports:
The government should focus on this business segment because it would infuse necessary foreign currencies.

2) Provide Accessible Credit for Business:

Business should be encouraged by the government to compensate for unemployment. More businesses mean more jobs for the people. Or, at least, source of income for the family.

3) Improve Tax Collection:

Taxes can finance government expenditures such as provision of credit to businesses or budgets for social welfare.

4) Set Aside Large Amount for Social Welfare:

This will reduce panic and riots and restore confidence in the people. Positive outlook will be developed which will also enable people to get back on their feet and start anew.

5) Control Expenditures in Other Fields:

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Slash budgets on unnecessary expenditures in other areas - military, legislative, executive, other branches.

6) Improve Tourism:
Lure more tourists to the country. More tourists mean more money injected to the economy. Businesses will naturally sprout even small businesses in order to cater to the needs of these tourists.

7) Improve funds:
The main problem is the lack of funds hence; we must encourage the injection of money back to the country.

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BIBLOGRAPHY: DEFINITON AND CONCEPT OF RECESSION: http://economics.about.com/od/economicsglossary/g/recession.htm http://recession.org/definition http://www.investorwords.com/4086/recession.html http://economics.about.com/od/economicsglossary/g/recession.htm SHAPES OF RECESSION: http://en.wikipedia.org/wiki/recession#Type_Of_Recession_Or_Shape TYPES OF RECOVERY FROM RECESSION: http://practicalstockinvesting.com/2009/12/30/a-2010-equity-portfoliotwo-types-of-recession-two-types-of-recovery CAUSES AND EFFECTS OF RECESSION: http://theviewspaper.net//the-causes-and-effect-of-recession RECENT US RECESSION: http://www.economicshelp.org/blog/recession/why-is-us-in-recession/
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www.usgovinfo.about.com

THE IMPACT OF A RECESSION:

http://www.indiastudychannel.com/resources/56851-Impactrecession.aspx IMPACT OF RECESSION ON GLOBAL ECONIMY:

http://en.wikipedia.org/wiki/recession#Global EFFECT OF RECESSION ON ASIAN ECONOMY:

http://en.wikipedia.org/wiki/Late-2000s_recession_in_Asia IMPACT OF RECESSION ON MALAYSIA:

http://siteresources.worldbank.org/INTEAPHALFYEARLYUPDATE/R esources/550192-1238574864269/59769181239010682147/update_april09_fullreport.pdf

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