Regardless of the fact if you know about a recession or not, one thing we can all unanimously agree to is the fact that recessions are extremely bad for the economy.
Usually caused due to a negative GDP, recession hits every business alike, and its impact can be felt years after the recession is over.
But, have you ever wondered what recession is? What are the major causes of recession? And, what happens in a recession due to a financial meltdown? In this article, we discuss the financial crisis that stems from an economic recession. Take a look:
In layman’s terms, a recession is a downturn in the economy. It marks an economic period with extremely slow or even negative growth rates and is generally symbolized by an alarming dip in the stock market. The National Bureau of Economic Research (NBER), which is responsible for tracking down the economy in the US, states recession as, “a period between a peak and a trough, and an expansion is a period between a trough and a peak. During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year.”
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Apart from that, there is also a general thumb rule that applies to a recession which states that recession happens when the GDP declines over the period of two consecutive quarters. While this definition is an easy way of understanding recession, it doesn’t provide a holistic view of the same.
Financial meltdowns that lead to recession can happen due to several other factors. These factors eventually affect the overall GDP. For instance, a fall in demand by consumers can lead to a recession. In general, there are five factors that drive an economy, namely, GDP, employment, income, manufacturing, and sales; and when any of these five factors take a hit due to one reason or the other, it can result in a financial crisis.
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A dwindling economy is seldom a positive sight, and it is only natural that its consequences are dire. As discussed above, there are only a handful of businesses that are not affected by a recession, but almost all other major industries go for a toss during a recession. There are some obvious aftermaths of a financial crisis. The most common way that recession impacts people is that employees get laid off, and businesses are shut.
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When the demand for a certain service decreases dramatically, the economy becomes extremely volatile and shows early signs of a meltdown. If the demand is not restored, the economy eventually spirals down into a state of crisis.
Apart from people losing jobs, and businesses shutting down, a financial meltdown increases costs of goods and services manifold. Prices go up, and people find it extremely hard to even carry out their day-to-day activities.
In simple terms, a recession is a disaster in the making, and if the economy finds it hard to come out of the clasps of a financial meltdown, the entire nation might slip into a state of economic depression- something that the US had to face in 1929. The Great Depression of the US lasted for about a decade, and the nation had to face several issues because of it.
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So, there you have it. If you found this article informative, let us know in the comments below.
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