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

Starting Point = Willingness to buy

 A2] Declining Market Economy
Starting 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;
Producer Price
Competitive Price = More Demand;
Consumer Price
In competitive Price = Less Demand;
 C] What is Recession?

Recession is the economy shrinking for two

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

GDP = Value of all the reported goods and services

produced by the people operating in the country

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

C = Consumables, I = Gross Investments, G = Government Spending,

X = Exports, M = Imports
 C] What is Recession?
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;
 C] What is Recession?
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;
 C] What is Recession?

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 come Growing economy has to

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

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

E1] OVER
PRODUCTION

PSEUDO DEMAND A situation in which the

ACTUAL NEED WAS supply exceeds the nation’s
NOT THERE; ability to consume what
WRONG PROJECTIONS
has
COMPANIES
been produced;
PRODUCED
MORE
Supply > Demand
 E] Why Recession happens?

E2] LOW E2.1] Word of mouth

CONFIDENCE
LEVEL
E2.2] Assignable Cause

E2.1] Word of mouth

ow Confidence Level Consumers are fearing that they may

Millions of lose their jobs; So, they have less
onsumers and confidence to spend money and buy
oducers after they goods; This will result in reduction
ear many job cuts, in demand in the market; Consumers
emand coming down, start saving money instead of spending
ompanies’ bankruptcy, money; This is a downward spiral in
c the economy;
 E] Why Recession happens?

E2] LOW E2.1] Word of mouth

CONFIDENCE
LEVEL
E2.2] Assignable Cause

E2.1] Word of mouth

ow Confidence Level Consumers

Producers are fearing
do not stockthat they may
materials, they
Millions of lose theirtheir
reduce jobs;productions,
So, they have less
gets into the
onsumers and confidence
cost reductionto spend moneyworried
activities, and buyabout
oducers after they goods; This will result
the profitability, etc…in reduction
ear many job cuts, in demand in the market; Consumers
emand coming down, start saving money instead of spending
ompanies’ bankruptcy, money; This is a downward spiral in
c the economy;
 E] Why Recession happens?
E2.2] 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 impact;

 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 Hotel
industries can affect “Un-related” industries
in the end;

One industry can hit many other industries when the

confidence level of millions of consumers & producers
drastically comes down;
 F] 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
 G] How to come out of recession?

It is unhealthy for any nation to be in Recession;

So, Government will take certain countermeasures
to eliminate or reduce the Effect of recession for turnaround;
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 Producers’ & the
Consumers’ behavior; But, they can influence millions of Producers &
Consumers with Government’s 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 money in the country
and collects money
 G] How to come out of recession?

Fiscal Government influences the economy by changing

Policies how it (Government) spends and collects money

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

Policies of money in the country

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 supply

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;
 G] How to come out of recession?

Monetary Government manipulates the available supply

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!!!!!!!!

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;
 I] WOW!!!!!!!!

Most of the developing Currently, GDP Growth

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