Understanding Recessions in Macroeconomics

Recession is a word that most of you would have come across more than once in business news. News of a recession in a country generally makes us think that the economy is not doing well. But what does recession truly mean and what is its significance to an economy?
 

In the upcoming video, Chris will introduce you to the concept of recession and explain the reasons why it might occur. 

So, in the video, you learnt that recession refers to a severe slowdown in economic growth, marked by falling income, decreasing GDP and increasing unemployment.

You learnt that a recession could be brought about by a significant decrease in demand, or by a severe reduction in supply, which is referred to as a shock.

• A demand-led recession occurs when an economy has a low aggregate demand owing to various factors, such as an increase in leakage from the economy by way of high imports or high savings, higher taxes.
• A supply-led recession or supply shock occurs when there is a sudden decrease in the aggregate supply of an essential commodity, which affects production in an economy.

Now, we will take a look at an example where a shock gave an impetus to economic activity. Let’s follow the case of North Dakota Oil Fields with Chris in the next video.

So, economic shocks can take a country in either direction. Now, you might be thinking that perhaps it is important for countries to determine where an economic shock will take them – growth or recession?

But in reality, the bigger question for countries is how they can predict an upcoming shock. And between both the types of shocks, it is more important to forecast and prevent a recession. 
 

Fortunately, there are certain indicators that can help forecast recessions. Let’s watch the next video and learn about them from Chris.

So, you have now learnt about the different metrics that can be examined to determine the possibility of a recession. The following metrics are particularly important:

1. Consumer Confidence
2. Stock Markets
3. Purchasing Managers Index (PMI)

Additional Learning

Read this interesting article on The Ascent website to learn about the four benefits of a recession.