Great Recession of the World

Topics: Recession, Inflation, Monetary policy Pages: 13 (4007 words) Published: August 27, 2013
GREAT RECESSIONS OF THE WORLD

GLOBAL MACROECONOMICS

Abstract

The NBER in the United States defines a recession as:

“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months (more than two quarters), normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” In this study of global recessions of the world our aim is to prepare a cause and effects analysis for four major recessions which have occurred in the world. We are considering recessions of USA in 2007-2009, in Early 2000’s in USA, Asian market crisis in 1997 and Japanese bubble burst in 1990’s. In each of these recessions our aim is to analyse its primary cause and their various effects on macroeconomic factors like GDP fall, unemployment, inflationary situations etc. so that we can come out with some of the possible indicators of recession for any economy. Our effort is to concentrate on major economic reflectors of recessionary economy to have a better understanding of recession.

“The Great Recession” - United States 2007

Overview

According to the National Bureau of Economic Research (NBER), the U.S. economy was in a recession for 18 months from December 2007 to June 2009. It was the longest and deepest recession of the post-World War II era. The recession can be separated into two distinct phases. During the first phase, which lasted for the first half of 2008, the recession was not deep as measured by the decline in gross domestic product (GDP) or the rise in unemployment. It then deepened from the third quarter of 2008 to the first quarter of 2009. The economy continued to contract slightly in the second quarter of 2009, before returning to expansion in the third quarter.

The 2007 recession features the largest decline in output, consumption, and investment, and the largest increase in unemployment, of any post-war recession. It is not uncommon for residential investment to decline more sharply than business investment and to begin declining before the recession. The 2007 contraction in residential investment was unusually severe.

A large part of the wealth of US households evaporated. Household net worth in the US (including non-profit organizations) went from $ 42.1 trillion (4.4×GDP) in 1999 to $51.7 trillion (3.6×GDP) in 2008 while the consumer price index (CPI) increased by 29%, and the number of households in the US increased to 117 million from 104 million. As a result, the net worth per household in real terms (1999 dollars) declined sharply from $402,000 to $343,000, a 15% drop. The unemployment rate captures the difficult times of the average citizen even better; it went up from 4.4% in 1999 to 7.2% in 2008 – and peaked at 10.1% in October 2009, even as discouraged workers increasingly dropped out of the workforce and no longer counted in the unemployment statistics.

One unique characteristic of the 2007 recession was the severe disruption to financial markets. Financial conditions began to deteriorate in August 2007, but became more severe in September 2008. While financial downturns commonly accompany economic downturns, financial markets have continued to function smoothly in previous recessions. This difference has led some commentators to instead compare the 2007 recession to the Great Depression.

Causes of Recession

Excessive Debt Levels

In order to counter the Stock Market Crash of 2000 and the subsequent economic slowdown, the Federal Reserve eased credit availability and drove interest rates down to lows not seen in many decades of American history. These low interest rates facilitated the growth of debt at all levels of the economy, especially private debt to purchase more expensive housing. High levels of debt have long been recognized as a causative factor for recessions. Any debt default has the possibility of causing the lender to also default, if the lender is itself in a weak...
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