before, understanding “recession”, we need to understand
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8/14/2019 Before, Understanding Recession, We Need to Understand
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Before, understandingRecession,we need to understand the
marketeconomy;A] TWO STAGES OF MARKET ECONOMY
B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY
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A1] Growing Market Economy
A2] Declining Market Economy
A] TWO STAGES OF MARKET ECONOMY
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A1] Growing Market Economy
tarting Point = Willingness to buy
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A2] Declining Market Economy
arting Point = Unwillingness to buy
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ducer wants his demand always to be highnsumer wants his buying cost always to be low
Actually, Demand is the price at whi
consumer is ready to buy andproducer is ready to sell;
B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY
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
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ecession is the economy shrinking for twoonsecutive quarters (=6 months) with aecrease in the GDP (=Gross Domestic Product)
DP = Value of all the reported goods and servicesroduced by the people operating in the country
C] What is Recession?
GDP = MONEY VALUE OF {C + I + G + (X M)}
onsumables, I = Gross Investments, G = Government SpendiX = Exports, M = Imports
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GDP is a good indicator of economy; Otherindicators could be;
-Unemployment Rate-Consumption Rate
-Actual Personal Income-Etc..
If GDP is growing, then market is growing
due to increased demand;
C] What is Recession?
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Growing economy hastocome down if theproduction
rate of goods &services was morethan the actualconsumption;
D] What is a Business Cycle?
What goes up; Has tocomedown;
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E] Why Recession happens?
E1] OVERPRODUCTION
E2] LOWCONFIDENCELEVEL
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A situation in whichthe
supply exceeds thenationsability to consume
what has
been produced;
E] Why Recession happens?
PSEUDO DEMAND
ACTUAL NEED WASNOT THERE;
WRONG PROJECTIONS
COMPANIESPRODUCED
MORE
E1] OVERPRODUCTION
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Confidence Levelillions ofumers and
ucers after theymany job cuts,and coming down,panies bankruptcy,
E] Why Recession happens?
Consumers are fearing that they maylose their jobs; So, they have lessconfidence to spend money and buy
goods; This will result in reductionin demand in the market; Consumersstart saving money instead of spendingmoney; This is a downward spiral in
the economy;
E2.1] Word of mouth
E2.2] Assignable Cause
E2.1] Word of mouth
E2] LOWCONFIDENCELEVEL
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Confidence Levelillions ofumers and
ucers after theymany job cuts,and coming down,panies bankruptcy,
E] Why Recession happens?
Consumers are fearing that they maylose their jobs; So, they have lessconfidence to spend money and buy
goods; This will result in reductionin demand in the market; Consumersstart saving money instead of spendingmoney; This is a downward spiral in
the economy;
E2.1] Word of mouth
E2.2] Assignable Cause
E2.1] Word of mouth
E2] LOWCONFIDENCELEVEL
Producers do not stock materials, theyreduce their productions, gets into the
cost reduction activities, worried aboutthe profitability, etc
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Incidences Happening;
mple: September 11 Terrorist Attack in US;
International Airport block in Thailand;Mumbai Attacked in India;
etc
Series of such incidencesleading into a kind of War
se see next slides, for details on business impact;
E] Why Recession happens?
E2.2] Assignable Cause
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Terrorists Attack on 11th September in US
Created fear in people
People cancelled their travel plans
Airlines & Hotel Industries badly hit
Resulted in low occupancy rates
Airline & Hotel Industries offered discounts,
gift coupons, to attract people
But, still, no improvement in occupancyrate
Airline & Hotel Industries startedCost Reduction activities CONTINUED
IN NEXT SLIDE
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Terrorists Attack on 11th September in US
i] Reduce No. of flights ii] Lay off peopleiii] Salary reduction toNot laid off people
In flight meals reducedLow or No income to
spend and buy goods
They became careful due
to the fear of loss of job
Meals supplying companygot the hit
Catering company now,lays off people
Demand for other goodscome down
Started saving moneyinstead of spending
Demand for other goodscome down
Airline & Hotel Industries startedCost Reduction activities
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, you can see how the hit on Airline and Hotel
ustries can affect Un-related industrie
the end;
e industry can hit many other industries when the
nfidence level of millions of consumers & producerastically comes down;
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Indicators to say a nation is in recession;
- People buying less stuff- Decrease in factory production
- Growing unemployment- Slump in personal income- An unhealthy stock market
F] How to know recession?
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nhealthy for any nation to be in Recession;overnment will take certain countermeasuresminate or reduce the Effect of recession for turnar
Important Point:
Today, it is a market Economy
Producers;Can produce andsell at their prices
Consumers;Can decide to
buy or not;
h Producers and Consumers are free to act; Not a forced ac
G] How to come out of recession?
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Government has 2 plans
Fiscal Policies(By Govt.)
Monetary Policies(By RBI)
Government does not have direct control on Producerers behavior; But, they can influence millions of Produceers with Governments policies;
Government influences theeconomy by changing howit (Government) spendsand collects money
RBI manipulatesthe available supply ofmoney in the country
G] How to come out of recession?
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G] How to come out of recession?
Government influences the economy by changihow it (Government) spends and collects mone
1] Tax cuts forbusinesses or
for individuals
More moneyavailable for
spending
Demand picksup; Market
can recover;
2] More Spendingby Govt. to
create jobs
Individuals getsalary and spend
money
3] Automaticfiscal policy;Unemployment
Insurance
Some income tounemployed
people to spend
FiscalPolicies
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G] How to come out of recession?
1] Reduce reserve
ratio
More moneyavailable for bank
to give loans
Demand picksup; Market
can recover;
Government manipulates the available supplof money in the countryMonetaryPolicies
What is Reserve Ratio?
Each bank has to keep a high % of their assets inRBI (Reserve Bank of India). These assets do notearn any interest to banks. This money kept inRBI is called Reserves; RBI sets certain ratioof this reserves and it is called Reserve Ratio
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G] How to come out of recession?
1] Reduce reserve
ratio
More moneyavailable for bank
to give loans
Demand picksup; Market
can recover;
2] Lower theinterest rates
Individuals takemore loan
Government manipulates the available supplof money in the countryMonetaryPolicies
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G] How to come out of recession?
1] Reduce reserve
ratio
More moneyavailable for bank
to give loans
Demand picksup; Market
can recover;3] Use its own
reservedmoney to buy
Govt. bonds
It becomes anincome to Govt.to inject money
into the market
Government manipulates the available supplof money in the countryMonetaryPolicies
2] Lower theinterest rates
Individuals takemore loan
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I] WOW!!!!!!!!
RBIs Power or Governments Power is double-edgedsword; Sometimes, their policies to recover from recessiocan be counter-productive and it may further worsen thesituation;
Nations recession is controlled by the actions ofeverybody living
in that country;
If we advise our people to save money, then, the multiplication effect is thatthe demand will not pickup and recession will continue; Very peculiar!!!!! But,am not misguiding you; Just think from a macro level, if everybody in thecountry stops spending, what will happen?
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ost of the developingconomies like China,
ndia;
Currently,Slow Down
Stage; Not yetin Recession
Currently,in Recession
Most of the developedEconomies like US,apan, Germany, etc
GDP GrowthRate Down; But,
Still expected to bAround 6% in India
GDP GrowthRate Negative;
I] WOW!!!!!!!!
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HOPING THIS TIMERECESSION VANISHES
SOON SO THATINDIA GETS BACK
TO ITS STRONGER
GDP GROWTH RATE
OF 8% TO 10%
(THOUGH THE EXPERSTSSAY IT WILL LAST TILLQ3 OF 2009)
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