What is recession?

o understand recession, we must first need to understand “What is GDP?”. GDP or Gross Domestic Product is sum of all private spending as well as government spending in goods, services, investments and labor.

By the proper definition, recession is said to occur when the GDP is negative for two or more consecutive quarters. Other factors can also be considered to judge the economic situation like the unemployment rate, spending levels, standard of living, stock market losses, absence of business expansion, declining housing prices etc.

Apart from the proper definition, there are many other criteria for recession. For example, a recession is a decrease of less than 10% in a country’s GDP.

In United States, the National Bureau of Economic Research (NBER) is the official in charge for declaring recession. NBER however, defines recession as- a significant decline in economic activity lasting for more than a few months.

Recession is a place of economic cycle which is foreseeable but is not detected. Recession is declared after many months of recession have passed. This is due to the fact that the NBER has to calculate the facts and data for several months and confirm it. Only after confirmation, they can declare recession.

The agency which is responsible for maintaining a proper balance between the money supply, interest rates and inflation is Federal Reserve. When the economic situation gets disbalanced, Federal Reserve floods the market with huge amount of money. This is helps to create the balance again by keeping the interest rates low. The inflation rate, however rising, does not affect the system anymore.

The increasing rate which can be caused due to many reasons like war, drought, etc can be considered a common reason for recession. This is due to the fact that as inflation rate rises, people start to spend less, cut their leisure and start saving money. Thus, due to less spending GDP decreases. AS GDP decreases, companies start to cut off their number of workers as much as possible leading to increased unemployment and ultimately to recession. If recession remains for an extended period, then the economic state is known as depression. It is very hard to come out of depression.

The main advantage of recession is that it helps to lower the inflation rate.