A recession in economics is defined by a period of at least 2 quarters of negative GDP growth. There was a global recession between 2008-2009, which most countries are now out of - but there are a number still in recession, including Portugal.
A recession is caused by a fall in GDP, from a reduction in AS, AD or both. The causes of a reduction in AD are a reduction in any of the components of C+I+G+(X-M). A fall in AS comes from increases in the costs of production such as a rise in unit labour costs, or a fall in the quality of education/training, as well as a number of other factors.
Recessions tend to lead to reductions in confidence which can further reduce consumption or investment spending. In a recession, however, governments tend to borrow more money which leads to increased public spending in an attempt to offset the reduction in consumption or investment. Spain said during its recession that they feared the social consequences of high unemployment (one of the things caused by a recession) and therefore increased benefits, which put an extra strain on government spending. Sometimes recession is caused by a reduction in exports which may be due to a world recession or a drop in world confidence.This should lead to a reduction in exchange rates which would reduce the price of exports and hopefully lead to a boost in AD.
Prolonged recession may be due to a serious lack of international competitiveness such as was experienced in Portugal recently. This is most likely due to high unit labour costs resulting from either an unproductive workforce or an underdeveloped industrial sector. In Portugal, the rate of young people leaving school was around 60% which probably led to a reduction in productivity of the labour force, and therefore a reduction in international competitiveness.
Your definition of 'recession' omits that the quarters have to be consecutive.
ReplyDeleteYou say: "A recession is caused by a fall in GDP, from a reduction in AS, AD or both"
If AS falls, how does that cause a recession if it also causes cost push inflation? Are you saying that a recession and cost-push inflation co-exist?
Why don't prices fall during a recession?
An oil price rise may cause a recession....
The reason we can have both recession and inflation is because wages are "sticky" and normally people don't accept lower wages in a time of recession. The prices for most goods and services will also stay the same in the early stages of recession.
ReplyDeleteIndividual wages may be sticky but the AS curve shows wage costs in total not per person. In a recession fewer people are employed and so wage costs fall.
ReplyDeleteSo how can we have a recession and inflation?
Why would prices not react to a decline in demand in a recession? Surely negative growth would cause deflation?
"Economists offer two principal explanations for why stagflation occurs. First, stagflation can result when the productive capacity of an economy is reduced by an unfavorable supply shock, such as an increase in the price of oil for an oil importing country. Such an unfavorable supply shock tends to raise prices at the same time that it slows the economy by making production more costly and less profitable.
ReplyDeleteSecond, both stagnation and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labor markets."
-Wikipedia.
Theoretically, though, yes, as GDP shrinks we would expect inflation to reduce - i am merely outlining a way in which stagflation can occur.
If the economy slows why would there be such a demand for oil? Surely the AD curve would shift and also the D curve for oil would leftward shift. Thus bringing the price down.
ReplyDeleteWhat type of 'excessive regulation of labour' could there be that would cause unemployment in an environment when the money supply is high?
No answer?
ReplyDeleteoil is a necessity in our society and even if somebody loses their job they will continue to demand oil for consumption in there car etc returning to a previous point of sticky wages you said that the total wage cost would reduce which is correct in a sense but letting people go is often a slow process and this will further reduce AD
Deletethank you
ReplyDeleteit is true that wages(wage contracts) are sticky in the short run, but in the long-run, they will eventually become flexible and the AS will shift outward. because wages are sticky in the shortrun, and not easily changed, firms will have to raise the prices of their goods to pay labour. with time, a new low wage contract will be negotiated.
ReplyDeleteit is true that wages(wage contracts) are sticky in the short run, but in the long-run, they will eventually become flexible and the AS will shift outward. because wages are sticky in the shortrun, and not easily changed, firms will have to raise the prices of their goods to pay labour. with time, a new low wage contract will be negotiated.
ReplyDelete