Features of recession essay

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‘For a strong recovery there is a need to encourage spending, ideally by businesses but also by households in the short term.’
0 7 Explain four features of a recession. (15 marks)
Recession is a prolonged period of negative growth over two consecutive quarters or more. Economics growth is an increase in equilibrium nation output in an economy over the period.
One of the features of recession is increase in unemployment, as less people are at work and now need support from government for example according to “the Chartered Institute of Personnel and Development (CIPD), the recession caused the loss of 1.3 million jobs “many firms have made their workers redundant which will increase government spending on benefits rather than receiving income tax revenue creating a deficit in budget position. As structural unemployment rises it make many workers deskilled and less will be produced reducing productivity and increasing spare capacity. Furthermore, as many people now have less income this will incentivise them to save rather than spend, lower consumption and consumption is a component of AD so AD will shift to left decreasing the price levels from PL1 to PL2 and decrease in real GDP from Y 1 to Y2. This shows that increase unemployment will lead to less productivity in the economy.

Another feature of recession is implementing tight fiscal policy which will decrease AD through increasing income tax revenue and lower government spending. As there is higher income taxes this allows individuals to have less disposable income which will decrease their spending. lack of demand causing many industries to collapse and decrease in productivity. AD will also shift to the left from AD1 TO AD 2 decreasing price levels of houses from PL1 to PL2 and decrease in the real output from Y1 to Y2

In a recession, unemployment rises, incomes fall, and consumers lack the confidence to make a big investment in the housing market. There is a correlation between recession and falling house prices. Homeowners feel less wealthy because their assets are no longer as valuable as they thought which incentivises them to save rather than invest. As investment is lower and it is a component of AD. AD will also shift to the left from AD1 TO AD 2 decreasing price levels of houses from PL1 to PL2 and decrease in the real output from Y1 to Y2. Falling house prices make many people feel less wealthy even though they have same income but don’t feel as valuable anymore and in order increase value they save.

Another feature of recession is low business confidence for example The China and US trade war, where US imposed China tariffs and will be collecting 15% on Chinese goods like headphones and Bluetooth. This trade war can limit spending which will drop business confidence and in order to lower their costs of production firms will make workers redundant. More worker will now save as they have lower incomes which will decrease spending on retail and decrease output and businesses will be affected. Unemployment will rise and many industries such as house market will decline, and many will feel less wealthy. Investment falls and is a component of AD which shifts AD to left from AD 1 to AD2 as well a decrease in price levels from PL1 to PL2 and decrease in real GDP from Y1 to Y2. This increases the spare capacity in the economy as its gets farther from Yfe and using resources efficiently.

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