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

tarting Point = Willingness to buy

A2] Declining Market Economy

arting 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;

Producer Price
Consumer Price

Usually, we think;
Demand = Quantity
But, here Demand = Price;
This is because,
Price decides the Quantity of Sales;
Competitive Price = More Demand;
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 Produ

GDP = Value of all the reported goods and ser

produced by the people operating in the coun
GDP = MONEY VALUE OF {C + I + G + (X M)}

Consumables, I = Gross Investments, G = Government Spendin

X = Exports, M = Imports

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;

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;

There is a joke that economists quote to

explain the
Difference between Recession &
RECESSION
Depression
= WHEN YOUR NEIGHBOR LOSES HIS JOB

DEPRESSION
= WHEN YOU LOSE YOUR JOB

D] What is a Business Cycle?

What goes up; Has to

come
down;

Growing economy has

to
come down if the
production
rate of goods &
services was more
than the actual
consumption;

E] Why Recession happens?

E1]
OVER PRODUCTION

E2]
LOW CONFIDENCE LEVEL

E] Why Recession happens?

E1]
OVER PRODUCTION
PSEUDO DEMAND
ACTUAL NEED WAS
NOT THERE;
WRONG PROJECTIONS
COMPANIES
PRODUCED
MORE

A situation in which
the
supply exceeds the
nations
ability to consume
what has
been produced;

E] Why Recession happens?

E2]
LOW CONFIDENCE LEVEL

E2.1] Word of mouth

E2.2] Assignable Caus

E2.1] Word of mouth

Low Confidence Level
of Millions of
consumers and
producers after they
hear many job cuts,
Demand coming down,
Companies bankruptcy,
etc

Consumers are fearing that they may

lose their jobs; So, they have less
confidence to spend money and buy
goods; This will result in reduction
in demand in the market; Consumers
start saving money instead of spending
money; This is a downward spiral in
the economy;

E] Why Recession happens?

E2]
LOW CONFIDENCE
LEVEL

E2.1] Word of mouth

E2.2] Assignable Cause

E2.1] Word of mouth

Low Confidence
Level
of Millions of
consumers and
producers after they
hear many job cuts,
Demand coming
down,
Companies

Consumers
fearing
they
Producers are
do not
stockthat
materia
lose
theirtheir
jobs;productions,
So, they have
less
reduce
gets
i
confidence
to spend
money
and
cost reduction
activities,
worrie
goods;
This will result
the profitability,
etcin reductio
in demand in the market; Consum
start saving money instead of sp
money; This is a downward spira
the economy;

E] Why Recession happens?

E2.2] Assignable Cause

Bad Incidences Happening;

Example: September 11 Terrorist Attack in U

International Airport block in Thail
Mumbai Attacked in India;
etc
Series of such incidences
leading into a kind of War

Please see next slides, for details on business

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
Cost Reduction activities

CONTINUED
IN NEXT SLIDE

Terrorists Attack on 11th September in US

Airline & Hotel Industries started
Cost Reduction activities

i] Reduce No. of flights

In flight meals reduced

ii] Lay off people

iii] Salary reduction to

Not laid off people

Low or No income to They became careful due

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,
lays off people

Demand for other goods

come down

So, you can see how the hit on Airline and Hote
industries can affect
in the end;

Un-related ind

One industry can hit many other industries wh

confidence level of millions of consumers & pro
drastically comes down;

F] How to know recession?

Indicators to say a nation is in recessio

- People buying less stuff

- Decrease in factory productio
- 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 countermeasur
to eliminate or reduce the Effect of recession for
Important Point:
Today, it is a market Economy

Producers;

Consumers;

Can produce and

sell at their prices

Can decide to
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 P

Consumers behavior; But, they can influence millions of
Consumers with Governments policies;

Government has 2 plans

Fiscal Policies
(By Govt.)
Government influences the
economy by changing how
it (Government) spends
and collects money

Monetary Policies
(By RBI)

RBI manipulates
the available supply of
money in the country

G] How to come out of recession?

Fiscal
Policies

Government influences the economy by changing

how it (Government) spends and collects money

1] Tax cuts for

businesses or
for individuals

More money
available for
spending

2] More Spending Individuals get

by Govt. to
salary and spend
create jobs
money
3] Automatic
Some income to
fiscal policy;
unemployed
Unemployment
people to spend
Insurance

Demand picks
up; Market
can recover;

G] How to come out of recession?

Monetary
Policies

Government manipulates the available supply

of money in the country

More money
1] Reduce reserve
available for bank
ratio
to give loans

Demand picks
up; Market
Each bank has to keep a high % of their assets in
can recover;
RBI (Reserve Bank of India). These assets do not
What is Reserve Ratio?

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
Policies

Government manipulates the available supp

of money in the country

More money
1] Reduce reserve
available for bank
ratio
to give loans
2] Lower the
interest rates

Individuals take
more loan

Demand picks
up; Market
can recover;

G] How to come out of recession?

Monetary
Policies

Government manipulates the available su

of money in the country

More money
1] Reduce reserve
available for bank
ratio
to give loans
2] Lower the
interest rates

Individuals take
more loan

3] Use its own

reserved
money to buy
Govt. bonds

It becomes an
income to Govt.
to inject money
into the market

Demand picks
up; Market
can recover;

I] WOW!!!!!!!!

RBIs Power or Governments Power is double-edged

sword; Sometimes, their policies to recover from recess
can be counter-productive and it may further worsen th
situation;

If we advise our people to save money, then, the multiplication effect

the demand will not pickup and recession will continue; Very peculiar!
am not misguiding you; Just think from a macro level, if everybody in
country stops spending, what will happen?

Nations recession is controlled by the actions of

everybody living
in that country;

I] WOW!!!!!!!!
Most of the
developing
Economies like
China,
India;
Most of the developed
Economies like US,
Japan, Germany, etc

Currently,
Slow Down
Stage; Not yet
in Recession

GDP Growth
Rate Down; But,
Still expected to be
Around 6% in India

Currently,
in Recession

GDP Growth
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)