The document outlines various economic states such as recovery, boom, recession, and depression, focusing on major variables like industrial production, employment, and bank credit. It also discusses financial crises, highlighting causes such as excessive borrowing and the effects on national economies, particularly during events like the European debt crisis and Brexit. Additionally, it explains the implications of these economic situations on GDP and fiscal conditions in countries including the U.S., Germany, and the UK.

3. Major
Variables
Recovery Boom Recession Depression
1. Industrial
production
Gradual
increase
Rapid increase Decline Rapid decline
2. Commodity
prices
-do- Rapid increase Decline Rapid decline
3. Cost of
production
Gradual
increase
Rapid increase,
but slower
than rise in
prices of goods
and services
Gradual
decline
Rapid decline,
but slower
than
commodity
prices.
4. Profits Satisfactory
level
High Gradual
decline
Negligible
profits or
losses
5. Investment Replacement
of existing
capital
equipment
High Falls slowly Falls rapidly

4. 6. Employment Gradual
increase
Rapid increase Starts falling Falls rapidly
7. Wage rate Improvement Rapid increase
but less than
the in rise in
prices of goods
and services
Starts falling Falls rapidly
than the
commodity
prices but less
Major Variables Recovery Boom Recession Depression

5. 8. Bank credit Liberal loans
and
satisfactory
demand for
advances
improvement
Liberal loans
and high
demand for
advances
Starts falling Falls rapidly
9. Bank
Reserves
Improvement Rapid increase Suffer a
setback
Falls rapidly
10. Discount
Rates
A little
improvement
Rapid increase Gradual
decline
Falls rapidly
11. Speculation
activity
Gradual
increase
At high level Minimum
possible
Hardly any
Major
Variables
Recovery Boom Recession Depression

6. 12. Inventory
stock
Gradual
decline
Very little Gradual
increase
High level
13. Business
failure
Smaller in
number
Hardly any Small in
number
Large in
number
14. Business
expectations
Optimism
coupled with
cautious
decision
making
Highly
optimistic
Pessimistic
with cautious
decision
making
Highly
pessimistic
Major
Variables
Recovery Boom Recession Depression

7. Country GDP growth rate
2006 2007 2008 2009
(forecast)
United states 2.8 2.0 1.4 -0.7
Germany 3.0 2.5 1.7 -0.8
United kingdom 2.8 3.0 0.8 -1.3
Japan 2.4 2.1 0.5 -0.2
India 9.7 8.7 7.8 6.3/ 5.8 *
Source: IMF and ES 2007 – 08, * - World bank

8.  A situation in which the wealth of a nation or State or
country experiences a sudden downturn brought on by
a financial crisis. An economy facing an economic
crisis will most likely experience a falling national
output, a drying up of liquidity and inflation/deflation.
An economic crisis can take the form of a recession or
depression.

9.  Primarily involved in the financial sector.
 It refers to the lack of money and credit for banks and
other financial institutions and rely on borrowing
money on money markets,
 Due to loan default and a collapse in confidence, banks
are reluctant to lend.
 Example Lehman Brothers - US subprime crisis
 From perspective of borrower you may notice that
lending becomes a little more expensive as banks seek
to recover their profit margins. (This may be offset by
cuts in base rate or other monetary interventions by CB

10.  A financial crisis is a situation in which the value of
financial institutions or assets drops rapidly. A financial
crisis is often associated with a panic or a run on the
banks, in which investors sell off assets or withdraw
money from savings accounts with the expectation that
the value of those assets will drop if they remain at a
financial institution.

11.  All the crises were preceded by “long periods of rapid
credit growth, low risk premiums.
 abundant availability of liquidity, strong leveraging,
soaring asset prices and the development of bubbles in
the real estate sector”.

12.  A fiscal crisis refers to governments struggling to repay its debt
and struggling to borrow enough money to meet its budget
deficit.
 If markets fear governments have borrowed too much, and there
is little chance of repayments, there will be a selling of the
government bonds, pushing up interest rates and giving
government bonds a very low credit rating.
 It then becomes a difficult cycle to break. Markets won’t lend.
Governments have to cut deficit by slashing spending.
 Slashing spending can cause a fall in GDP and hence even lower
tax revenues. A fiscal crisis, usually involves governments
seeking outside help such as IMF intervention.
 E.g. European Fiscal Crisis.

13.  Recession, leads to a rise in government borrowing.
 Governments receive lower tax (unemployment) and
spend more on benefits
 In many Eurozone economies, this rapid rise in
government borrowing, worried markets. Therefore,
investors sold bonds, causing interest rates to rise.
 This led to a debt crisis, with greater pressure on
governments to reduce spending and budget deficits.
 :

14.  A sovereign debt crisis is generally defined as
economic and financial problems caused by the
(perceived) inability of a country to pay its public
debt. This usually happens when a country reaches
critical high debt levels and suffers from (perceived)
low economic growth.

15.  The core of the debt crisis lie the peripheral countries of
Greece, Ireland, Spain and Portugal. While these countries
only account for approximately 13% of total Eurozone GDP
The European debt crisis (often also referred to as the
Eurozone crisis or the European sovereign debt crisis) is
a multi-year debt crisis that has been taking place in the
European Union since the end of 2009. Several eurozone
member states (Greece, Portugal, Ireland, Spain and
Cyprus) were unable to repay or refinance their government
debt or to bail out over-indebted banks under their national
supervision without the assistance of third parties like other
Eurozone countries, the European Central Bank (ECB), or
the International Monetary Fund (IMF).

16.  A currency crisis is when serious doubt exists as to
whether a country's central bank has sufficient
foreign exchange reserves to maintain the country's
fixed exchange rate.
 Accompanied by a speculative attack in the foreign
exchange market.
 Results from chronic balance of payments deficits,
and thus is also called a balance of payments
crisis. Often such a crisis culminates in a
devaluation of the currency.
 A currency crisis is a type of financial crisis

17. Economic Crisis
Credit crisis
Involves financial sector e.g US subprime
Wider implication leads to financial crisis
Financial crisis Involves mortgage/
defaults/bank losses/declined
bank lending
Shortage of credit impacts economy
(Real) fall in GDP/ Economic output
Leads to debt crisis pressure to
reduce spending and budget
deficit.
Govt receives lower tax and
increases expenditure for revival
Fiscal crisis
Govt struggling to repay debt and
to borrow money to meet budget
deficit
Involves govt seeking help from IMF
Sovereign Debt
Currency crisis
Rapid fall in the value of currency e.g
iceland
Can be the result of fiscal crisis
Hyperinflation/supply side shock Zimbabwe case/Rapid rise in Crude oil prices

18. Crisis Type Originating
Countries
Origin of
Problems
Manifestation Trigger Exchange Rate
Regime
Remarks
Latin American Emerging Markets
(Latin American
1982; India 1991);
Small advanced
country (Greece
2010 Onwards)
Government
Borrowing
Current Account
Details
Speculative
Attack and
Exchange
Rate collapse
Fixed Rate Greece was part of
Euro, So trigger
was sharp rise in
interest rates.
Asian Financial
Crisis
Emerging Markets
(East Asia 1997-9;
Eastern Europe
2008; Fragile Five
2013); Small
Advanced Country
(Spain 2010)
Corporate
Borrowing
Asset Price Bubbles;
High Corporate
Leverage
“Sudden Stop”
of capital
flows and
exchange are
collapse
Fixed Rate Fragile Five had
flexible exchange
rates. Spain was
part of Euro.
Japan Systematically
Important
Corporate
Borrowing
Asset Price Bubbles;
High Corporate
Leverage
Asset price
collapse
Floating
Exchange Rate
Yen appreciated
after crisis
Global Financial
Crisis
Systematically
Important (US 2008)
Bank and
Consumer
Borrowing
Asset Price Bubble in
housing
Correction in
asset prices
Flexible
exchange rate
US Dollar
Appreciated
The Next Systematically
Important
Corporate
Borrowing
Rising debt asset price
bubbles
“Sudden Stop”
with potential
for sharp
exchange rate
decline
Managed Float Crisis Country’s
Currency could
depreciate
substantially

19.  Asian Financial crisis - stemmed from inappropriate borrowing
by the private sector. Due to high rates of economic growth and
a booming economy, private firms and corporations looked to
finance speculative investment projects. However, firms
overstretched themselves and a combination of factors caused a
depreciation in the exchange rate as they struggled to meet the
payments.
 Foreign debt-to-GDP ratios rose from 100% to 167% in the
four large ASEAN economies in 1993-96
 Countries like Thailand, Indonesia, South Korea had large
current account deficits.
 Financial deregulation encouraged more loans and helped to
create asset bubbles.
 Booming economy and booming property markets
encouraged expansive borrowing by firms.

20.  Late 1980s, excess liquidity in the financial system caused an
asset and stockmarket bubble. People with spare cash bought
assets and shares causing them to rise.
 Late1980s, the Japanese monetary authorities were worried
about inflation and so doubled interest rates. They were then
slow to reduce them.
 This caused a fall in house and share prices, which lasted 10
years. It is one of the longest bear markets on record.
 Higher interest rates and slumping asset values caused an
increase in loan defaults.
 Loan defaults were compounded because Japanese banks had
made a series of bad lending decisions.
 Stagnation

21. •High structural debt before crisis. Exacerbated by ageing
population in many European countries.
•Recession causing sharp rising in budget deficit.
•Credit crunch causes losses for Commercial banks.
•Investors much more cautious and fearful of default in all types
of debt.
•Southern European economies uncompetitive (higher labour
costs) but can’t devalue to restore competitiveness. This causes
lower growth and lower tax revenues in these countries.
•No Lender of last resort (like in UK and US) makes markets
nervous of holding Eurozone debt.
European Sovereign Debt Crisis

22.  Greece borrowed heavily in
 international capital markets to fund government
budget and current account deficits. The profligacy of
the government, weak revenue collection, and
structural rigidities in Greece’seconomy are typically
cited as major factors behind Greece’s accumulation of
debt

23.  The Greek government formally requested financial
assistance from the 16 member states of the Eurozone and
the International Monetary Fund(IMF), and a €110 billion
(about $145 billion) package was announced on May 2,
2010.
 The package aims to prevent Greece from defaulting on its
debt obligations and to stem contagion ofGreece’s crisis to
other European countries, including Portugal, Spain,
Ireland, and Italy.
 Despite the substantial size of the package, some
economists are concerned that the Eurozone/IMFpackage
might not be enough to prevent Greece from defaulting on,
or restructuring, its debt, oreven from leaving the Eurozone.
Greece’s debt crisis threatened to widen across Europe, as
bondspreads for several European countries spiked and
depreciation of the euro began to accelerate

24.  Driven
 down by such fears, global stock markets plunged sharply on
May 6, 2010, and the euro fell to a
 15-month low against the dollar. Seeking to head off the
possibility of contagion to countries such
 as Portugal and Spain, EU finance ministers agreed to a broader
€500 billion (about $686 billion)
 “European Financial Stabilization Mechanism” on May 9, 2010.
Some analysts assert that such a
 bold, large-scale move had become an urgent imperative for the
EU in order to break the
 momentum of a gathering European financial crisis. Investors
reacted positively to the
 announcement of the new agreement, with global stock markets
rebounding on May 10, 2010, to
 re-gain the sharp losses of the week before.

25.  October 2009, the Papandreou government has unveiled
four separate
 packages of fiscal austerity measures aimed at bringing
Greece’s government deficit down froman estimated
13.6% of GDP in 2009 to below 3% by 2014.33
 emphasized the need for longer-term structuralreforms to
the Greek economy. enhancing employment and
 economic growth, fostering increased private sector
development, and supporting research,
 technology, and innovation.

26.  Between 2001, when Greece adopted the euro as its
currency, and 2008,
 Greece’s reported budget deficits averaged 5% per
year, compared to a Eurozone average of 2%,
 and current account deficits averaged 9% per year,
compared to a Eurozone average of 1%.10 In
 2009, Greece’s budget deficit is estimated to have
been more than 13% of GDP
 Greece’s reliance on external financing for funding
budget and current account deficits left its
 economy highly vulnerable to shifts in investor
confidence.

27.  The fact that it had “built a financial house of cards”.
“Iceland represents an extreme case of a huge financial
system towering over a small economy”.
 Behind the encouraging image of low unemployment,
income per person above the average in the European
Union, huge investments in green energy and inflows of
foreign investment, the country’s 3 largest banks and its
households built huge amounts of debt.
 The credit crisis was enough to make Iceland’s banking
system, its credit rating and its currency all collapse at the
same time.
 As a result, Iceland’s GDP fell by 15% from its top point to
the bottom reached during the crisis.

28.  Portugal’s weaknesses have been a large public debt and a
high budget deficit.
 Rapid economic growth before joining the euro in 1999, but
afterwards it has been impacted by a steady loss of
competitiveness in wages.
 The 1990s have been a “lost decade for the economy” and as a
result, it became difficult to manage the country’s public
 Portugal had to refinance EUR 9.5bn of public debt then. The
yield of 6.7% paid by Portugal for the ten year bonds sold in
January 2011 is very close to 7%, which some Portughese
officials

29.  Brexit is an abbreviation of "British exit", which refers
to the June 23, 2016 referendum by British voters to
exit the European Union. The referendum roiled global
markets, including currencies, causing the British
pound to fall to its lowest level in decades. Prime
Minister David Cameron, who supported the UK
remaining in the EU announced he would step down in
October.
 May

30.  After leaving the EU, the UK would lose unrestricted
access to the Single Market, and preferential access to 53
non-EU markets.
 UK trade would then initially be governed by World Trade
 Organisation rules, leading to higher tariffs for goods and to
other barriers in accessing the Single Market, notably for
financial services. Bilateral UK-EU trade would contract.
 Concluding a Free Trade Agreement with the EU, similar to
the one between the EU and Canada, would provide a
partial offset for UK trade by 2023.

31.  The UK would also continue to face additional barriers
on third-country markets to which preferential access
was lost as a result of EU exit.
 Immigration accounts for one-half of UK GDP growth
since 2005, with more than 2 million jobs created.
 Curbs to the free movement of labour from the EU and,
more importantly, a weaker UK economy after exit,
would gradually reduce the incentives for economic
migration to the UK and would be a cost to the
economy.
 Brexit would generate a financial shock beyond the
UK, magnified by the appreciation of other currencies
against sterling

32.  member of the European Union (EU) in 1973, GDP per
capita in the United
 Kingdom (UK) has doubled, outpacing other affluent
non-EU English-speaking countries Heightened
economic uncertainty would reduce confidence,
holding back spending decisions, and tighten financial
conditions by lifting risk premia, thus increasing the
cost of finance and reducing its availability.
 A danger is that large capital outflows, or a break in
inflows, might threaten the financing of the record-high
current account deficit of 7% of GDP.

33.  The UK labour and product markets are amongst the most flexible in the
OECD, which suggests that EU regulations are not an important barrier.
 further regulatory liberalisation, although this would be challenging since
regulations are comparatively low and the gains would be limited.
 Fiscal savings from stopping net transfers to the EU budget are likely to be
0.3-0.4% of GDP per year, which is a relatively small amount. Lower GDP
growth would weigh on the fiscal position significantly, limiting the scope
to use the net EU budget savings to relax fiscal policy.
 By 2030, in a central scenario, UK GDP would be over 5% smaller than if
the UK had remained a member of the EU. The costs would then be
equivalent to GBP 3200 per household (in today’s
 prices). In a more pessimistic scenario these would be even higher, at GBP
5000 per household.
 In the longer term, the impact on the remaining EU countries would be
small given the relatively low UK share in global trade and the scope for
other policies to offset the shock.

34.  :Brexit would continue to generate substantial structural
changes in the economy, reflecting the new relationship
with the EU and new policies over 2024-30.
 Access to the Single Market is important for foreign direct
investment (FDI). Brexit would cut FDI inflows, notably
from the EU, resulting in lower UK business investment
and a decline in the capital
 Trade and investment are important drivers of long-term
GDP growth. Brexit would result in lower openness and
innovation, weakening technical progress and productivity
in the UK.
 Long-term GDP growth would be further reduced through
a smaller pool of skills, stemming from lower immigration
and reduced FDI, reducing managerial quality.

35. Economy
 The economic pros and cons of Brexit have been hotly debated. According to an
OECD analysis of Britain’s economic prospects outside the EU, even the best-
case scenario will see every home losing £2,200 by 2020 after Brexit. That
verdict is backed up by the CBI, which has warned that leaving the EU would
cost £100 billion to GDP by 2020 and lead to the loss of 950,000 jobs.
 The Bank of England’s Monetary Policy Committee, meanwhile, claims that
Brexit is likely to lead to a weak pound– good for UK exporters, bad for UK
tourists and the price of imported goods. The Leave campaign has countered
that pulling out the EU will allow Britain to retain the money it currently pays
in (although Leave’s favored figure has been thoroughly discredited).
Security
 Should Britain stay in the EU to enhance its security? The Remain campaign
highlights the benefits of international cooperation in implementing sanctions,
sharing intelligence and enforcing arrest warrants.
 Leave has a very different account of the pros and cons of Brexit. According to
Leave, the EU “stops us controlling who comes into our country, on what terms,
and who can be removed.”