before, understanding “recession”, we need to understand

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;


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,


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



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Confidence Levelillions ofumers and

ucers after theymany job cuts,and coming down,panies bankruptcy,


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


E2.1] Word of mouth


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;




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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



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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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1] Reduce reserve

ratio

More moneyavailable for bank

to give loans


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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1] Reduce reserve

ratio


to give loans


can recover;

2] Lower theinterest rates

Individuals takemore loan



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1] Reduce reserve

ratio


to give loans


can recover;3] Use its own

reservedmoney to buy

Govt. bonds

It becomes anincome to Govt.to inject money

into the market


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)

before, understanding “recession”, we need to understand

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