3. Before, understanding “Recession”, we need to understand the market economy A] TWO STAGES OF MARKET ECONOMY - Growing Market Economy - Declining Market Economy B] TWO FACTORS OF MARKET - DEMAND & SUPPLY
11. Recession & Depression RECESSION = WHEN YOUR NEIGHBOR LOSES HIS JOB DEPRESSION = WHEN YOU LOSE YOUR JOB
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13. Business Cycle Business Cycle What goes up; Has to come Down… Growing economy has to come down if the production rate of goods & services was more than the actual consumption
15. [1] Over Production PSEUDO DEMAND Actual Need Was Not There; Wrong Projections Companies Produced More A situation in which the supply exceeds the nation’s ability to consume what has been produced Supply > Demand
16. [2] Low Confidence Level LOW CONFIDENCE LEVEL [A] Word of Mouth [B] Assignable Cause Low Confidence Level of Millions of consumers and producers after they hear many job cuts, Demand coming down, Companies bankruptcy, etc Consumers are fearing that they may lose their jobs; So, they have less confidence to spend money and buy goods; This will result in reduction in demand in the market; Consumers start saving money instead of spending money; This is a downward spiral in the economy. [A] Word of Mouth Producers do not stock materials; they reduce their productions, gets into the cost reduction activities, worried about the profitability, etc…
17. [2] Low Confidence Level Bad Incidences Happening Example: September 11 Terrorist Attack in US; International Airport block in Thailand; Mumbai Attacked in India etc… [B] Assignable Cause Series of such incidences leading into a kind of War
18. Terrorists’ Attack on 11 th 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 occupancy rate Airline & Hotel Industries started “ Cost Reduction” activities CONTINUED IN NEXT SLIDE
19. i] Reduce No. of flights ii] Lay off people iii] Salary reduction to “ Not laid off people” In flight meals reduced Low or No income to spend and buy goods They became careful due to the fear of loss of job Meals supplying company got the hit Catering company now, lays off people Demand for other goods come down Started saving money instead of spending Demand for other goods come down Airline & Hotel Industries started “ Cost Reduction” activities
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22. History of Recession July 1980 - November 1982 2 years total July 1990- March 1991 8 months March 2001- November 2001 8 months December 2007- Current 16 months as of April 2009
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25. USA Recession Result Overconsumption/ Extravagant spending by the consumer Thus, For years prices of homes in US kept rising
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29. Because of layoff Unemployment started to rise which resulted in further reduction in spending by consumer. USA Recession
38. USA Recession Bank of America agreed to purchase Merrill Lynch , & consortium of 10 banks created an emergency fund of at least $70 billion to deal with the effects of Lehman's closure.
39. USA Recession Another bank failure occurred on September 25 when JP Morgan Chase agreed to purchase the banking assets of Washington Mutual
53. Government influences the economy by changing how it (Government) spends and collects money 1] Tax cuts for businesses or for individuals More money available for spending Demand picks up Market can recover 2] More Spending by Govt. to create jobs Individuals get salary and spend money 3] Automatic fiscal policy; Unemployment Insurance Some income to unemployed people to spend Fiscal Policies
54. How to come out of recession? 1] Reduce reserve ratio More money available for bank to give loans Demand picks up; Market can recover Government manipulates the available supply of money in the country Monetary Policies What is Reserve Ratio? Each bank has to keep a high % of their assets in RBI (Reserve Bank of India). These assets do not earn any interest to banks. This money kept in RBI is called “Reserves”; RBI sets certain ratio of this reserves and it is called “Reserve Ratio”
55. How to come out of recession? 1] Reduce reserve ratio More money available for bank to give loans Demand picks up; Market can recover 2] Lower the interest rates Individuals take more loan Government manipulates the available supply of money in the country Monetary Policies
56. How to come out of recession? 1] Reduce reserve ratio More money available for bank to give loans Demand picks up; Market can recover 3] Use its own reserved money to buy Govt. bonds It becomes an income to Govt. to inject money into the market Government manipulates the available supply of money in the country Monetary Policies 2] Lower the interest rates Individuals take more loan
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59. HOPING THIS TIME RECESSION VANISHES SOON SO THAT INDIA GETS BACK TO ITS STRONGER GDP GROWTH RATE OF 8% TO 10% (THOUGH THE EXPERSTS SAY IT WILL LAST TILL Q3 OF 2009)
