A country is said to be in recession if its economy experiences two successive quarters of what is known as "negative growth". For this to happen, the total amount of goods and services produced by the country - known as gross domestic product (GDP) - would have to contract on a quarter by quarter basis for a total period of six months.
There are different degrees of Recession according to the time and its impact on the economy. If the economy contracts in two consecutive quarters but then recover and actually see growth for the year as a whole. then, most commentators would label it a mild recession. However, there is also the danger of a full-blown or severe recession when there is an absolute decline in economic growth on a year-by-year basis.
Over a long period of time a lot of Recessions had come and gone affecting the world economy and there is a discussion among the economists for the reasons behind them and for ways of their avoidance.
Can Recessions be really avoided?? It is a difficult question to answer and to some extent de-pends upon the economy. The following factors influence the recession.
1. Global Dependency :Due to forces of globalization and the interdependence of world economies, a recession in one country often causes a recession in others. For ex-ample, a recession in the EU, would definitely affect the UK economy because the EU is UK‟s main export partner. When the world economy slows down, a recession is harder to avoid in an export oriented economy. However, individual countries may deviate from the global trends depending on the internal environment. For example, in the subprime crises India was not affected compared with other countries like US, Japan etc. due to the internal policies and huge domestic consumption.
2. Natural Cycle: It was felt that economic growth was subject to a natural cycle of high growth followed by low growth or recession. It was felt that it was not possible to prevent these cycles. However, in recent decades, it appears that economic cycles have become less pronounced; i.e. booms less noticeable, but re-cessions shorter and deeper. Therefore, it is possible to minimize fluctuations so as to avoid an actual downturn.
3. Economic Stability: The best way to avoid a boom and bust, is for the government / monetary authorities to avoid a boom; if the economy expands too rapidly and inflation occurs, there comes a point when it is almost impossible to avoid a recession. If economic growth is kept close to the long run trend rate and you avoid speculative bubbles, this is the best way to avoid a recession. If the economy is allowed to grow above the long run trend rate, then bust becomes almost inevitable. But in a Capitalistic economy avoidance of a boom or bust is not much practically feasible.
4.International rise in prices: Some economic factors are beyond the control of governments. A rapid rise in oil prices creates a situation of stagflation; rising inflation and fal-ling living standards. It presents a difficult situation. There is a limit to what can be done, when there is a supply side shock. Whatever policy is implemented there is likely to be a worse trade off.
5.Fiscal Policy: In a recession, the aim is to boost Aggregate demand through cutting tax and increasing government spending. In theory, this injection into the economy can boost demand and stimulate the economy. To be effective expansionary fiscal policy requires:
6.Monetary Policy:
There are different degrees of Recession according to the time and its impact on the economy. If the economy contracts in two consecutive quarters but then recover and actually see growth for the year as a whole. then, most commentators would label it a mild recession. However, there is also the danger of a full-blown or severe recession when there is an absolute decline in economic growth on a year-by-year basis.
Over a long period of time a lot of Recessions had come and gone affecting the world economy and there is a discussion among the economists for the reasons behind them and for ways of their avoidance.
Can Recessions be really avoided?? It is a difficult question to answer and to some extent de-pends upon the economy. The following factors influence the recession.
1. Global Dependency :Due to forces of globalization and the interdependence of world economies, a recession in one country often causes a recession in others. For ex-ample, a recession in the EU, would definitely affect the UK economy because the EU is UK‟s main export partner. When the world economy slows down, a recession is harder to avoid in an export oriented economy. However, individual countries may deviate from the global trends depending on the internal environment. For example, in the subprime crises India was not affected compared with other countries like US, Japan etc. due to the internal policies and huge domestic consumption.
2. Natural Cycle: It was felt that economic growth was subject to a natural cycle of high growth followed by low growth or recession. It was felt that it was not possible to prevent these cycles. However, in recent decades, it appears that economic cycles have become less pronounced; i.e. booms less noticeable, but re-cessions shorter and deeper. Therefore, it is possible to minimize fluctuations so as to avoid an actual downturn.
3. Economic Stability: The best way to avoid a boom and bust, is for the government / monetary authorities to avoid a boom; if the economy expands too rapidly and inflation occurs, there comes a point when it is almost impossible to avoid a recession. If economic growth is kept close to the long run trend rate and you avoid speculative bubbles, this is the best way to avoid a recession. If the economy is allowed to grow above the long run trend rate, then bust becomes almost inevitable. But in a Capitalistic economy avoidance of a boom or bust is not much practically feasible.
4.International rise in prices: Some economic factors are beyond the control of governments. A rapid rise in oil prices creates a situation of stagflation; rising inflation and fal-ling living standards. It presents a difficult situation. There is a limit to what can be done, when there is a supply side shock. Whatever policy is implemented there is likely to be a worse trade off.
5.Fiscal Policy: In a recession, the aim is to boost Aggregate demand through cutting tax and increasing government spending. In theory, this injection into the economy can boost demand and stimulate the economy. To be effective expansionary fiscal policy requires:
- Low government borrowing. If you already have very high levels of government borrowing, it becomes difficult to finance further expansionary fiscal policy.
- Responsiveness of consumers. Cutting taxes may not always boost consumer spending, if people prefer to save the money.
6.Monetary Policy:
- Cutting interest rates should make borrowing cheaper and stimulate demand. However, lower interest rates don't always work
- If confidence is very low, people may not want to borrow, even if borrowing is cheaper. E.g. Japan had 0% interest rates in the 1990s, but, failed to stimulate the economy.
No comments:
Post a Comment