recession - a layman's approach

8/8/2019 Recession - A Layman's Approach

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Before, understanding Recession, we need to understand the marketeconomy;

A] TWO STAGES OF MARKET ECONOMY

B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY


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A1] Growing Market Economy

A2] Declining Market Economy

A] TWO STAGES OF MARKET ECONOMY


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A1] Growing Market Economy

Starting Point = Willingness to buy


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A2] Declining Market Economy

Starting Point = Unwillingness to buy


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Producer wants his demand always to be highConsumer wants his buying cost always to be low

Actually, Demand is the price at which

consumer is ready to buy andproducer is ready to sell;

B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

Producer Price

Consumer Price

Usually, we think;Demand = Quantity

But, here Demand = Price; This is because,Price decides the Quantity of Sales;Competitive Price = More Demand;In competitive Price = Less Demand;


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R ecession is the economy shrinking for twoconsecutive quarters (=6 months) with adecrease in the GDP (=Gross Domestic Product)

GDP = Value of all the reported goods and servicesproduced by the people operating in the country

C] What is Recession?

GDP = MONEY VALUE OF {C + I + G + (X M)}

C = Consumables, I = Gross Investments, G = Government Spending,X = Exports, M = Imports


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GDP is a good indicator of economy; Otherindicators could be;

-Unemployment Rate-Consumption Rate

-Actual Personal Income-Etc..

If GDP is growing, then market is growing due to

increased demand;



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GDP is a good indicator of economy; Otherindicators could be;

-Unemployment Rate-Consumption Rate

-Actual Personal Income-Etc..

If GDP is growing, then market is growing due to

increased demand;

Note : If the recession continues for next quarter, (>6months) then we go through DEP R ESSION

Economy;



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RECESSION

= WHEN YOUR NEIGHBOR LOSES HIS JOB

There is a joke that economists quote to explain theDifference between Recession & Depression


D EPRESSION

= WHEN YOU LOSE YOUR JOB


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Growing economy has tocome down if theproductionrate of goods & services wasmore than the actualconsumption;

D] What is a Business Cycle?

What goes up; Has to comedown;


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E] Why Recession happens?

E1] OVER PRODUCTION

E2] LOW CONFIDENCELEVEL


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A situation in which thesupply exceeds the nations

ability to consume what hasbeen produced;

Supply > Demand


PSEUDO DEMAND

ACTUAL NEED WASNOT THERE;

WRONG PROJECTIONS

COMPANIESPRODUCED

MORE

E1] OVER PRODUCTION


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Low Confidence Levelof Millions of consumers andproducers after they hear many job cuts,Demand coming down,Companies bankruptcy,

etc


Consumers are fearing that they may lose their jobs; So, they have lessconfidence to spend money and buy goods; This will result in reductionin demand in the market; Consumersstart saving money instead of spending money; This is a downward spiral in

the economy;

E2.1] Word of mouth

E2.2] Assignable Cause

E2.1] Word of mouth



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Low Confidence Levelof Millions of consumers andproducers after they hear many job cuts,Demand coming down,Companies bankruptcy,

etc


Consumers are fearing that they may lose their jobs; So, they have lessconfidence to spend money and buy goods; This will result in reductionin demand in the market; Consumersstart saving money instead of spending money; This is a downward spiral in

the economy;

E2.1] Word of mouth


E2.1] Word of mouth


Producers do not stock materials, they reduce their productions, gets into the

cost reduction activities, worried aboutthe profitability, etc


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Bad Incidences Happening;

Example: September 11 Terrorist Attack in US;International Airport block in Thailand;Mumbai Attacked in India;etc

Series of such incidencesleading into a kind of War

Please see next slides, for details on business impact;




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T errorists 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 startedCost Reduction activities CON T INUEDIN NEX T SLIDE


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Terrorists Attack on 11 th September in US

i] Reduce No. of flights ii] Lay off peopleiii] Salary reduction toNot 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 goodscome down

Started saving money instead of spending

Demand for other goodscome down

Airline & Hotel Industries startedCost Reduction activities


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So, you can see how the hit on Airline and Hotel

industries can affect Un-related industriesin the end;

One industry can hit many other industries when the

confidence level of millions of consumers & producersdrastically comes down;


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Indicators to say a nation is in recession;

- People buying less stuff - Decrease in factory production- Growing unemployment- Slump in personal income- An unhealthy stock market

F] How to know recession?


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It is unhealthy for any nation to be in Recession;So, Government will take certain countermeasuresto eliminate or reduce the Effect of recession for turnaround;

Important Point: Today, it is a market Economy

Producers;Can produce andsell at their prices

Consumers;Can decide to

buy or not;

Both Producers and Consumers are free to act; Not a forced action

G] How to come out of recession?


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Government has 2 plans

Fiscal Policies(By Govt.)

Monetary Policies(By RBI)

Hence, Government does not have direct control on Producers & theConsumers behavior; But, they can influence millions of Producers &Consumers with Governments policies;

Government influences theeconomy by changing how it (Government) spendsand collects money

RBI manipulatesthe available supply of money in the country



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1] Reduce reserveratio

More money

available for bank to give loans

Demand picksup; Marketcan 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 inRBI (Reserve Bank of India). These assets do notearn any interest to banks. This money kept inRBI is called Reserves; RBI sets certain ratioof this reserves and it is called Reserve Ratio


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1] Reduce reserve

ratio

More money



2] Lower theinterest rates

Individuals takemore loan


Monetary Policies


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1] Reduce reserve

ratio

More money



3] Use its ownreservedmoney to buy

Govt. bonds

It becomes anincome to Govt.to inject money

into the market


Monetary Policies

2] Lower theinterest rates

Individuals takemore loan


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I] WOW!!!!!!!!

RBIs Power or Governments Power is double-edgedsword; Sometimes, their policies to recover from recessioncan be counter-productive and it may further worsen thesituation;

Nations recession is controlled by the actions of everybody living

in that country;

If we advise our people to save money, then, the multiplication effect is thatthe demand will not pickup and recession will continue; Very peculiar!!!!! But, Iam not misguiding you; Just think from a macro level, if everybody in thecountry stops spending, what will happen?


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Most of the developing Economies like China,India;

Currently,Slow Down

Stage; Not yetin Recession

Currently,in Recession

Most of the developedEconomies like US,

Japan, Germany, etc

GDP GrowthRate Down; But,

Still expected to be Around 6% in India

GDP GrowthRate Negative;


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HOPING THIS TIME

RECESSION VANISHESSOON SO THAT

INDIA GETS BACK

TO ITS STRONGER GDP GROWTH RATE

OF 8% T O 10%(THOUGH THE EXPERSTS

SAY IT WILL LAST TILLQ3 OF 2009)

recession - a layman's approach

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