The United States has been experiencing economic recession since early of the year 2008. Latvia, Estonia and Lithuania are also at risk of facing economic recession for the next 12 months. While Canada, Britain and Japan may foresee a recession in their economy in the future.
With all this recession risks, ordinary people, could not help but wonder what exactly is an economic recession.
The economic cycle is that when an economy is strong, people are employed and earning. There will be a great demand for outputs like food, electronics, vehicles and other products. The production will increase until it exceeds the actual demand. This would create a rise in prices or inflation.
Salary would then have difficulty accommodating the rising prices of products. The prices will be too expensive for consumers, that they will stop buying or sales would not increase. When the demand decreases, companies will lay off workers creating a large population of unemployed work force.
These are several signs of an economic recession. Decline in housing prices, decline in the stock market, and business expansion plans being put on hold are also signs of a recession.
According to the United States National Bureau of Economic Research, it is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
Economic recession is a contraction phase of the business cycle. The common definition for recession is that there is a relative decline in a country’s gross domestic product or GDP. Having a negative real economic growth for two or more successive quarters is also a telltale sign for economic recession.
Gross domestic product is the market value of all the products and services produced in a region or commonly, country, in a year. GDP is the total output of the economy. GDP is measured every quarter. Since the gross domestic product or the output is declining. There is less need for people who are creating the product. Firms and companies will sever their ties with several employees resulting to unemployment.
A severe or long recession could be an economic depression. The difference between recession and depression is when the GDP is declining by 10%, that means what the economy is experiencing is already depression. A short -lived recession is often called economic correction.
Based on the definition of the National Bureau of Economic Research (NBER), recession can last “more than a few months.” Therefore, an official announcement that a country or region is experiencing recession can only be made after economic decline for six months. Typically, a normal economic recession lasts for approximately one year.
Periodic recessions are part of a country’s or region’s economy. According to Tom Harris (How Recession Works), the United States has an economic pattern. The United States economy will expand for six until ten years and then enter a recession for about six months or two years. The start of the recession is called the peak, end of recession if trough. Meanwhile the period of time between two peaks or two recessions is called the business cycle.
NBER, a private, non profit research organization studies the American economy. The Business Cycle Dating Committee maintains the chronology of business cycle. They also decides whether the economy is in recession or expansion
Economists may argue with the definition of an economic recession. They may even debate whether the United States, specifically is experiencing an economic downturn. But it is not only the economists who can decide and identify an economic downfall, it is the ordinary people who can readily identify economic growth and demise.