Define Economic Recession

Recession, or economic recession, is a term thrown around the news media a lot these days.  The use of this word brings an initial reaction of fear and trepidation, but many don’t really know what this actually term means or how it affects people. By examining the meaning and factors that indicate a recession, you can be better prepared to understand the difficulties that can arise.

THe simplest definition of recession is "a downturn in the activity of the economy." The academic meaning of the term, however, is more specific. Not any downturn is considered a recession. A recession exists only in an economy that shows a decline in the Gross Domestic Product (GDP) for two consecutive quarters.

The GDP is an indicator of the value of goods and services produced by the labor force and property of a country. When the GDP declines in a country, the economy reacts by slowing. Suppliers produce less and consumers, in turn, buy less. Spending slows in all sectors of society and therefore demands for products are all reduced. When demands fall, suppliers need less labor to ensure adequate product availability, thus unemployment rises. 

Differences between Recession and Depression 

Periods of recession and depressions are defined by a negative growth in the GDP. The main difference between the two terms is a matter of time and degree. The degree of decline in the GDP differentiates recessions from depressions. Depressions are defined as periods where the GDP declines by more than ten percent. Declines of less than ten percent are considered a time of recession. 

The length of a recession also plays into the defining of a depression. The longer a recession lasts the more likely it is to develop into a depression. The last depression this country experienced was following the stock market crash of 1929. This depression showed a drop in the GDP of 33% and was followed by a severe time of economic hardship on many Americans for the next four years. 

Personal Effects of a Recession 

Your personal finances will be the most effected during a recession. These effects will be felt not only be in the increased amount of money needed to buy everyday items, but also as a drop in the value of your savings and real property. 

Retirement funds in the form of stocks will show a decrease in value as the prices of the stock market falls, reflecting the decline in GDP. Real property such as homes and land will also show a decrease in value. Both of these decreases can decrease personal networth virtually overnight by a wide percentage, depending on how severe the drop is. 

Probably one of the most frightening effects of a recession is the rise in unemployment. As companies reduce their workforce by layoffs and dismissals, many workers find themselves in dire financial straits without the funds required to care for their basic needs and those of their families. Unemployment payments are only a fraction of the wages that they were earning and severe cuts are required to try to meeting their financial commitments. 

Government Controls to End Recessions 

During periods of recession, the government has a number of tactics that can be instituted to curb the effects and bring the recession to an end. The typical response of the government is to increase public spending to try to spur the economy into activity. Tax cuts are also advocated to increase capital spending in companies, which should stimulate growth. The final main recourse for the government is to increase their own monetary supply thus stimulating consumer spending. 

Regardless of which approach is chosen, there are consequences that must be faced in the future. Increases in spending on public programs causes the deficit of the country to increase, but this is often ignored due to the immediacy of the current recession. Increasing the monetary supply also has the effect of devaluing our currency and this can lead to inflation. Finally, generating tax cuts to stimulate growth brings with it further increases in the deficit due to the reduction in tax revenues used to fund the government and the government's previous commitments.