What is recession? What causes it? What are the consequences?
In: Economics
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.
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