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

tarting Point = Willingness to buy

 A2] Declining Market Economy
arting 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;

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

Consumer Price
 C] What is Recession?

Recession is the economy shrinking for two

consecutive quarters (=6 months) with a
decrease in the GDP (=Gross Domestic Produ

GDP = Value of all the reported goods and ser

produced by the people operating in the coun

GDP = MONEY VALUE OF {C + I + G + (X M)}

Consumables, I = Gross Investments, G = Government Spendin

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 Growing economy has

come to
down; come down if the
production
rate of goods &
services was more
than the actual
consumption;
 E] Why Recession happens?

E1] E2]
OVER PRODUCTION LOW CONFIDENCE LEVEL
 E] Why Recession happens?

E1]
OVER PRODUCTION

PSEUDO DEMAND A situation in which

ACTUAL NEED WAS the
NOT THERE; supply exceeds the
WRONG PROJECTIONS
nations
COMPANIES
ability to consume
PRODUCED what has
MORE
been produced;
 E] Why Recession happens?
E2.1] Word of mouth
E2]
LOW CONFIDENCE LEVEL
E2.2] Assignable Caus

E2.1] Word of mouth

Low Confidence Level Consumers are fearing that they may

lose their jobs; So, they have less
of Millions of
confidence to spend money and buy
consumers and goods; This will result in reduction
producers after they in demand in the market; Consumers
hear many job cuts, start saving money instead of spending
Demand coming down, money; This is a downward spiral in
the economy;
Companies bankruptcy,
etc
 E] Why Recession happens?

E2] E2.1] Word of mouth

LOW CONFIDENCE
LEVEL E2.2] Assignable Cause

E2.1] Word of mouth

Low Confidence Consumers
Producers are fearing
stockthat they
Level do not materia
lose theirtheir
jobs;productions,
So, they have less
of Millions of reduce gets i
confidence to spend money and
consumers and cost reduction activities, worrie
goods; This will result
producers after they the profitability, etcin reductio
in demand in the market; Consum
hear many job cuts, start saving money instead of sp
Demand coming money; This is a downward spira
down, the economy;
Companies
 E] Why Recession happens?
E2.2] Assignable Cause

Bad Incidences Happening;

Example: September 11 Terrorist Attack in U

International Airport block in Thail
Mumbai Attacked in India;
etc

Series of such incidences

leading into a kind of War

Please see next slides, for details on business

 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
CONTINUED
Cost Reduction activities
IN NEXT SLIDE
 Terrorists Attack on 11th September in US

Airline & Hotel Industries started

Cost Reduction activities

iii] Salary reduction to

i] Reduce No. of flights ii] Lay off people
Not laid off people

Low or No income to They became careful due

In flight meals reduced
spend and buy goods to the fear of loss of job

Meals supplying company Demand for other goods Started saving money
got the hit come down instead of spending

Catering company now, Demand for other goods

lays off people come down
So, you can see how the hit on Airline and Hote
industries can affect Un-related ind
in the end;

One industry can hit many other industries wh

confidence level of millions of consumers & pro
drastically comes down;
 F] How to know recession?

Indicators to say a nation is in recessio

- People buying less stuff

- Decrease in factory productio
- 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 countermeasur
to eliminate or reduce the Effect of recession for
Important Point:
Today, it is a market Economy

Producers; Consumers;
Can produce and Can decide to
sell at their prices 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 P
Consumers behavior; But, they can influence millions of
Consumers with Governments policies;

Government has 2 plans

Fiscal Policies Monetary Policies

(By Govt.) (By RBI)

Government influences the RBI manipulates

economy by changing how the available supply of
it (Government) spends
and collects money
money in the country
 G] How to come out of recession?

Fiscal Government influences the economy by changing

how it (Government) spends and collects money
Policies
1] Tax cuts for More money
businesses or available for
for individuals spending

2] More Spending Individuals get Demand picks

by Govt. to salary and spend up; Market
create jobs money can recover;
3] Automatic
Some income to
fiscal policy;
unemployed
Unemployment
people to spend
Insurance
 G] How to come out of recession?

Monetary Government manipulates the available supply

of money in the country
Policies
More money
1] Reduce reserve
available for bank
ratio
to give loans

What is Reserve Ratio?

Demand picks
up; Market
Each bank has to keep a high % of their assets in
RBI (Reserve Bank of India). These assets do not
can recover;
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
 G] How to come out of recession?

Monetary Government manipulates the available supp

of money in the country
Policies
More money
1] Reduce reserve
available for bank
ratio
to give loans

2] Lower the Individuals take

Demand picks
interest rates more loan up; Market
can recover;
 G] How to come out of recession?

Monetary Government manipulates the available su

Policies of money in the country

More money
1] Reduce reserve
available for bank
ratio
to give loans

2] Lower the Individuals take

Demand picks
interest rates more loan up; Market
can recover;
3] Use its own It becomes an
reserved income to Govt.
money to buy to inject money
Govt. bonds into the market
 I] WOW!!!!!!!!

RBIs Power or Governments Power is double-edged

sword; Sometimes, their policies to recover from recess
can be counter-productive and it may further worsen th
situation;

If we advise our people to save money, then, the multiplication effect

the demand will not pickup and recession will continue; Very peculiar!
am not misguiding you; Just think from a macro level, if everybody in
country stops spending, what will happen?

Nations recession is controlled by the actions of

everybody living
in that country;
 I] WOW!!!!!!!!

Most of the Currently, GDP Growth

developing Slow Down Rate Down; But,
Stage; Not yet Still expected to be
Economies like Around 6% in India
China, in Recession
India;

Most of the developed

Economies like US, Currently, GDP Growth
Japan, Germany, etc in Recession 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)