Two consecutive quarters of negative GDP growth is the usual macroeconomic definition of a recession. When this happens, private companies often reduce production in order to reduce their exposure to systematic risk. As aggregate demand falls, measurable levels of spending and investment are likely to fall, putting natural downward pressure on prices. Companies lay off workers to cut expenses, causing GDP to fall and unemployment rates to climb.
In macroeconomics, what is recession?
A recession is defined as a major drop in economic activity across the economy that lasts more than a few months and is reflected in real GDP, real income, employment, industrial output, and wholesale-retail sales.
Is macroeconomics concerned with recessions?
The levels and rates of change of main macroeconomic indicators such as employment and national output, which are superimposed over long-term macroeconomic growth trends, go through periodic ups and downs, expansions and recessions, in a phenomena known as the business cycle. The 2008 financial crisis is a contemporary example, and the Great Depression of the 1930s was the catalyst for most current macroeconomic theory development.
What are some macroeconomics examples?
A macroeconomic factor is a significant fiscal, natural, or geopolitical event that has a broad impact on the economy of an area or country. Macroeconomic forces tend to affect large groups of people rather than a small number of people. Economic outputs, unemployment rates, and inflation are examples of macroeconomic factors. Governments, businesses, and consumers all keep a careful eye on these indices of economic performance.
What impact does a recession have on macroeconomics?
Traditional fiscal stimulus analysis focuses on the short-run effects of fiscal policy on GDP and employment creation in the near term. Economists, on the other hand, have long recognized that short-term economic situations can have long-term consequences. Job loss and declining finances, for example, can cause families to postpone or forego their children’s college education. Credit markets that are frozen and consumer spending that is down can stifle the growth of otherwise thriving small enterprises. Larger corporations may postpone or cut R&D spending.
In any of these scenarios, an economic downturn can result in “scarring,” or long-term damage to people’s financial positions and the economy as a whole. The parts that follow go through some of what is known about how recessions can cause long-term harm.
Economic damage
Higher unemployment, decreased salaries and incomes, and lost opportunities are all consequences of recessions. In the current slump, education, private capital investments, and economic opportunities are all likely to suffer, and the consequences will be long-lasting. While economies often experience quick growth during recovery periods (as idle capacity is put to use), the drag from long-term harm will keep the recovery from reaching its full potential.
Education
Many scholars have pointed out that educationor the acquisition of knowledgeis important “Human capitalalso known as “human capital”plays a crucial role in promoting economic growth. Delong, Golden, and Katz (2002), for example, assert that “Human capital has been the primary driver of America’s competitive advantage in twentieth-century economic expansion.” As a result, variables that result in fewer years of educational achievement for the country’s youth will have long-term effects.
Recessions can have a variety of effects on educational success. First, there is a large body of research on the importance of early childhood education (see, for example, Heckman (2006, 2007) and the studies mentioned therein). Because parental options and money drive schooling at this stage (pre-k or even younger), issues that diminish families’ resources will have an impact on the degree and quality of education offered to their children. Dahl and Lochner (2008), for example, indicate that household income has a direct impact on math and reading test scores.
Second, a variety of factors outside of the school environment influence educational attainment. Health services, for example, can remove barriers to educational attainment, from prenatal care to dental and optometric treatment. After-school and summer educational activities have an impact on academic progress and learning in the classroom. Forced housing dislocationsand, in the worst-case scenario, homelessnesshave a negative impact on educational outcomes. Economic downturns obviously affect all of these factors on educational performance. In 2008, 46.3 million individuals were without health insurance, with over 7 million children under the age of 18 being uninsured (U.S. Census 2009). We can expect even more children to struggle with their schooling as poverty (nearly 14 million children in 2008) and foreclosures (4.3 percent of home loans in the foreclosure process1) rise.
Finally, families who are trying to make ends meet are frequently pushed to postpone or abandon aspirations for further education. According to a recent survey of young adults, 20% of those aged 18 to 29 have dropped out or postponed education (Greenberg and Keating 2009). According to a survey performed in Colorado, a quarter of parents with children attending two-year colleges expected to send their children to four-year colleges before the recession (CollegeInvest 2009).
College attendance is costly if it is postponed or reduced. Not only does attending college lead to higher earnings, lower unemployment, and other personal benefits, but it also leads to a slew of social benefits, such as improved health outcomes, lower incarceration rates, higher volunteerism rates, and so on (see, for example, Baum and Pa-yea (2005) or Acemoglu and Angrist (2000)).
Opportunity
There’s no denying that recessions and high unemployment restrict economic opportunities for individuals and families. Individuals and the greater economy suffer losses as a result of job losses, income decreases, and increases in poverty.
To give just one example of missed opportunities, recent study has indicated that college graduates who enter the workforce during a recession earn less than those who enter during non-recessionary times. Surprisingly, the findings also imply that the income loss is not only transient, but also affects lifetime wages and career paths. “Taken together, the findings show that the labor market effects of graduating from college in a terrible economy are big, negative, and enduring,” writes Kahn (2009). She finds that each 1 percentage-point increase in the unemployment rate results in an initial wage loss of 6 to 7%, and that the wage loss is still 2.5 percent after 15 years.
Non-college graduates will most likely do badly. While unemployment has grown for all demographics throughout the recent crisis, individuals with less education and lower incomes face significantly greater rates than others.
Job loss
The unemployment rate has risen from 4.9 percent in December 2007 to 9.7 percent in August of this year during the current recession. About 15 million people are unemployed right now, more than double the level at the onset of the recession, with nearly one out of every six workers unemployed or underemployed. About 5 million individuals have been out of job for more than six months, making up the greatest percentage of the total workforce since 1948.
Losing one’s employment causes obvious challenges for most people and their families. Even once a new job is taken, the income loss can last for years (often at a lower salary).
Although the research on the effects of job loss is far too large to discuss here, Farber’s evidence is worth highlighting (2005). Farber concludes that job separation is costly, based on data from the Displaced Workers Survey from 2001 to 2003. 2 “In the most recent period (2001-03), approximately 35% of job losers were unemployed at the next survey date; approximately 13% of re-employed full-time job losers are working part-time; full-time job losers who find new full-time jobs earn about 13% less on average than they did on their previous job…”
Job loss has an impact on one’s mental health in addition to their income and earnings (see Murphy and Athanasou (1999) for a review of 16 earlier studies). It’s also worth noting that how one does during a recession is determined by a multitude of things. When compared to other age groups, older employees are disproportionately represented among the long-term unemployed.
Economic mobility
As previously stated, intergenerational mobility or the lack thereof can exacerbate the effects of recessions.
Through a variety of processes, poorer families can lead to less opportunities and lower economic results for their children, whether through nutrition, school attainment, or wealth access. As a result, a recession should not be viewed as a one-time occurrence that strains individuals and families for a few years. Economic downturns, on the other hand, will affect the future chances of all family members, including children, and will have long-term effects.
Private investment
Investments and R&D are two of the most obvious areas where recessions can stifle economic progress. Economists have long acknowledged the importance of investment and technology as driving forces behind economic growth. 4
Investment spending and the adoption of innovative technology can and do decline during recessions. At least four causes have contributed to this. First, a downturn in the economy will reduce demand for enterprises’ products as customers’ incomes fall, diminishing the return on investment. Second, enterprises’ ability to invest will be hampered by a lack of credit. Third, recessions are periods of greater uncertainty, which may cause businesses to cut down on spending “They may be less willing to experiment with new items and procedures because they are “core” products and production techniques. Finally, the relationship between human and physical capital must be considered. Technology is frequently integrated in new physical equipment: as output and employment decline, fewer fresh equipment purchases are made. As a result, workers are less able to put existing abilities to use, and there is less of a need to learn new ones “current employees to be “up-skilled,” or hire new employees with new skills.5
Figure C depicts non-residential investment growth during each of the last four recessions, as well as a more specialized category of equipment and software (thus excluding structures). Annualized quarterly non-residential investment averaged 4.7 percent from 1947 to 2009, whereas investment in equipment and software averaged 5.9 percent. Investment falls sharply during recessions, as shown in the graph. It also demonstrates the severity of the present slump, with total non-residential investment down 20% from its peak in the second quarter of 2009.
The repercussions of reduced investment levels are evident. Decreased levels of economic production in the future are a result of lower capital investment today. Poorer levels of physical investment can lead to lower productivity and, as a result, lower earnings. 6 The consequences will linger long after the present recession has officially ended.
Entrepreneurial activity: Business formation and expansion
Apart from the general drop in investment activity, recessions, particularly those with a credit crunch, such as the current one, can stifle small firm formation and entrepreneurial activity.
There are various ways that recessions might stifle the establishment and expansion of new businesses. To begin with, it is self-evident that new businesses require new clients. Because a slowing economy equals less overall spending, those considering starting a new firm may prefer to wait until demand returns to typical levels. Second, new businesses necessitate the addition of new debtors and investors. Lower wages and wealth levels may make it more difficult for new businesses to recruit individual investors, and credit limits may limit private bank financing.
“The credit freeze in the short-term funding market had a disastrous effect on the economy and small enterprises,” according to a recent analysis from the US Small Business Administration (SBA 2009). The usual production of products and services had virtually stalled by late 2008.” According to a study of loan officers, conditions for small-business commercial and industrial loans have been dramatically tightened.
Not only do recessions make it more difficult to establish a new firm, but they can also derail struggling new businesses. There could be a slew of new firms (and business models) popping up.
els) that might be successful in normal times but can’t because to a lack of demand or credit. In 2008, 43,500 businesses declared bankruptcy, up from 28,300 in 2007 and more than double the 19,700 that declared bankruptcy in 2006. (SBA 2009).
The influence of the recession can also be observed in the number of initial public offerings (IPOs). Firms use the funds earned from initial public offerings (IPOs) to grow their operations. There were just 21 operating company IPOs in 2008, down from an annual average of 163 the previous four years (Ritter 2009). 8 Furthermore, the median age of IPOs in 2008 was slightly greater than in previous years, indicating that the capital flood is going to the more established companies.
It’s tempting to believe that recessions just delay the establishment of new businesses, and that delayed plans will eventually be implemented. However, many new enterprises have a limited window of opportunity to get started. Furthermore, innovative new businesses frequently build on previous technological and innovation platforms. A delay in one business may cause delays in many others, causing a cascade effect across a wider variety of businesses.
Is the recession an inflationary or deflationary period?
A recession is a time in which the economy grows at a negative rate. A drop in output (Real GDP) for two consecutive quarters is the official definition.
The rate of inflation has been decreasing since 2010. Prices are still rising, although at a slower pace.
Deflation
Since World War II, recessions have often not resulted in deflation, but rather in a decreased rate of inflation. Attempts to lower a high inflation rate triggered the two recessions of 1980 and 1991.
In May 2008, the RPI (which includes the cost of interest payments) fell below zero, indicating deflation. This deflation, however, did not endure long.
The United Kingdom underwent a significant period of deflation (lower prices) in the 1920s and 1930s as a result of the Great Depression.
- Overvaluation of the pound – The Gold Standard made imports cheaper but made exports less competitive.
Difference between Recession and Depression
Surprisingly, many people consider deflation to be an indication of depression rather than just a slump in the economy. (Another symptom of depression is a considerably larger and longer drop in GDP.)
What are the signs of a recession?
The business cycle includes recessions, which are a normal, albeit unpleasant, part of the process. A spate of corporate failures, including often bank failures, weak or negative growth in production, and high unemployment characterize recessions. Even if recessions are only temporary, the economic misery they create can have significant consequences that transform an economy. This can happen as a result of structural changes in the economy, such as vulnerable or obsolete firms, industries, or technologies failing and being swept away; dramatic policy responses by government and monetary authorities, which can literally rewrite the rules for businesses; or social and political upheaval caused by widespread unemployment and economic distress.
What’s the difference between macroeconomics and microeconomics?
The study of how individuals and businesses allocate scarce resources is known as microeconomics. Macroeconomics is the study of the entire economy.
What does microeconomics imply?
Microeconomics is the study of what is likely to happen (tendencies) when people make decisions as a result of changes in incentives, pricing, resources, and/or production processes. Individual players, such as customers, sellers, and business owners, are frequently divided into microeconomic subgroups. These organizations control the supply and demand for resources through the use of money and interest rates as a pricing mechanism.
What exactly is a micro economy?
Microeconomics is the study of people’s, households’, and businesses’ decision-making and resource allocation behavior. It deals with interpersonal and economic issues and is often applicable to products and service marketplaces.
What are some examples of micro and macroeconomics?
What do Microeconomics and Macroeconomics have in common? Macroeconomics includes unemployment, interest rates, inflation, and GDP. Microeconomics includes concepts such as consumer equilibrium, individual income, and savings.