Recession

Recession Presented By

Gupta Sec. A

Ajay Kumar Roll No. 06

Before understanding “Recession”, we need to understand the market Economy and Market 1] TWO STAGES OF MARKET ECONOMY --

2] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

1] TWO STAGES OF MARKET ECONOMY

a)- Growing Market Economy

b)- Declining Market Economy

a)- Growing Market Economy

Starting Point = Willingness to buy

b)- Declining Market Economy

tarting Point = Unwillingness to buy

2] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

oducer wants his demand always to be high nsumer wants his buying cost always to be low

Actually, Demand is the price at whic 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

3] What is Recession? National Bureau of Economic Research (NBER) is the official agency in charge of declaring that the economy is in a state of recession. Recession is the economy shrinking for two consecutive quarters (=6 months) with a decrease in the GDP (Gross Domestic Product) growth.

GDP = Total valueVALUE of allOFthe reported GDP = MONEY {C + I + G + (Xgoods – M)} and services Consumptions, I = Gross Investments, G = Government Spendin produced by the people operating X = Exports, M = Imports in the country

3] What is Recession? GDP is a good indicator of an economy; Other indicators could be; -Unemployment Rate -Consumption Rate -Actual Personal Income -Etc.. A GDP, in simple terms, is used to gauge the health of an economy then 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

3] What is Recession? There is a joke that economists quote to explain the Difference between “Recession & Depression” RECES SION = WHEN YOUR NEIGHBOR LOSES HIS JOB

DEPRE SSION = WHEN YOU LOSE YOUR JOB

4] 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;

5] Why Recession happens?

a)- OVER PRODUCTION

b)- LOW CONFIDENCE LEVEL

5] Why Recession happens?

a)- OVER PRODUCTION PSEUDO DEMAND ACTUAL NEED WAS NOT THERE; WRONG PROJECTIONS COMPANIES PRODUCED MORE

A situation in which the supply exceeds the nation’s ability to consume what has been produced;

5] Why Recession happens? b)- LOW CONFIDENCE LEVEL

b.1] Word of mouth b.2] Assignable Cause

b.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 producers after they goods; This will result in reduction in demand in the market; Consumers hear many job cuts, Demand coming down,start saving money instead of spendin money; This is a downward spiral in Companies’ bankruptcy, the economy; etc

5] Why Recession happens? b) LOW CONFIDENCE LEVEL

b.1] Word of mouth b.2] Assignable Cause

b.1] Word of mouth

fearing they may Low Confidence Level Consumers Producers are do not stockthat materials, th lose theirtheir jobs;productions, So, they have less of Millions of reduce gets into th confidence to spend money and buy consumers and cost reduction activities, worried abo This will result producers after they goods; the profitability, etc…in reduction in demand in the market; Consumers hear many job cuts, Demand coming down,start saving money instead of spendin money; This is a downward spiral in Companies’ bankruptcy, the economy; etc

5] Why Recession happens? b.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 impac

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

In flight meals reduced

ii] Lay off people

iii] Salary reduction to “Not laid off people”

Low or No income to They became careful due 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, lays off people

Demand for other goods come down

o, you can see how the hit on Airline and Hotel

ndustries can affect n the end.

“Un-related” industrie

ne industry can hit many other industries when the onfidence level of millions of consumers & producer rastically comes down.

6] 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

7] How to come out of recession?

unhealthy for any nation to be in Recession. Government will take certain countermeasures liminate or reduce the Effect of recession for turnaro 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

7] How to come out of recession?

, Government does not have direct control on Producers mers’ behavior; But, they can influence millions of Producer mers with Government’s policies.

Government has 2 plans Fiscal Policies (By Govt.)

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

Monetary Policies (By RBI)

RBI manipulates the available supply of money in the country

7] How to come out of recession?

Government influences the economy by changin Fiscal how it (Government) spends and collects money Policies 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;

7] How to come out of recession?

Government manipulates the available supply Monetary Policiesof money in the country More money 1] Reduce reserve available for bank ratio 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”

7] How to come out of recession?

Government manipulates the available supply Monetary Policiesof money in the country More money 1] Reduce reserve available for bank ratio to give loans 2] Lower the interest rates

Individuals take more loan

7] How to come out of recession?

Government manipulates the available supply Monetary Policiesof money in the country More money 1] Reduce reserve available for bank ratio 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;

8] Think !!!!

RBI’s Power or Government’s 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?

Nation’s recession is controlled by the actions of everybody living in that country;

8] WOW!!!!!!!!

Currently, Most of the developing Slow Down Economies like China, Stage; Not yet India; in Recession

Most of the developed Economies like US, Japan, Germany, etc

Currently, in Recession

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

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 FINISH TILL Q3 OF 2009)

References: Google search engine.  McKinsey reports.  World economic forum  World social forum  Harvard business review  Accountancy magazine  The Economists 

04/03/09

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Ajay Kumar Gupta PGDM, ICBM-SBE, Hyderabad [email protected]