What is recession? What causes it? What are the consequences?

672 views

What is recession? What causes it? What are the consequences?

In: Economics

Recession is the economy going down the gutter big time.

It may have many causes.

For example a plague or war.
Many people are dead.
Dead peeps cant work.
No goods are produced.
No services can be provided.
No one can buy them.
Economy down.

Another example is the too much money in circulation.
Say a country has to finance a war and starts printing money.
More money is good right?
NO.
Too much money means it’s worth goes down.
That’s called inflation by the way.
Suddenly a loaf of bread costs 1000$ and you
can’t by shit.
Nobody can buy shit and the economy goes down.

In general you can think of the economy as a circulation of money. If the circulation isn’t working the economy will start to slow down.

Very simplified version:

The health of an economy can be measured by how much “production” is happening. If more cars/houses/software is being created and sold, the economy is in good shape.

A recession is a time period where the economy is not in good shape. Production has gone down, so businesses are making less profit, workers are being fired, investors are losing their investments, etc. This tends to form a downward spiral where more and more people lose out over time.

Recessions happen because of either (1) demand or (2) supply reasons. Very broadly, demand decreasing could be due to a investment bubble crash, massive loss of life, sudden restrictions in credit, large tax hikes, or any other event that causes less people to be able to spend less dollars on goods. Supply decreasing could be due to running out of resource (eg oil, rare earths), shrinking labour force, or any other factor that makes it harder for companies to produce goods/services.

Typically, there are 3 main methods used to combat recessions. (1) the interest rate is lowered to boost investment and spending, (2) the government borrows more money to inject demand into the economy, or (3) the government tries to boost supply with economic reforms. These all have varying degrees of success and different limitations/drawbacks.