Causes of Recessions
● A recession is a period of at least six months (2 quarters) of economic declinewhich
causes a decrease in the real gross domestic product (rGDP)
● It can be caused by a fall in any of the factors that influence total demand (consumption,
investment, government spending, net exports) e.g. consumptionfell during Covid 19
lockdowns causing many economies to experience a recession
● It can also be caused by supply-side shocks that create challenges for firms and
consumers. E.g. The Russian war on the Ukraine has reduced the supply of natural gas, oil
and petrol resulting in major disruptions and increased energy costs
Factors That Reduce Total Demand and Total Supply
Demand-side Factors Supply-side Factors
● ●
A fall in consumer confidence reduces Unexpected supply shocks such as
consumption the war on Ukraine or the Japanese
● A fall in business confidence reduces Tsunami of 2011
investment ● A gradual decline in the productive
● Increasing levels of unemployment capacity of the economy when capital
reduce consumption (machinery) grows old and is not
● Decreasing levels of government replaced
spending ● A gradual decline in the level of
● Increased interest rates require education/training available in an
borrowers to repay higher amounts on economy
their loans - this reduces discretionary ● On-going industrial actionsuch as
income which reduces consumption worker strikes which disrupt the supply
● Shocks to other economies can reduce of labour to an economy
demand for a country's exportsthus ● Weather eventswhich destroy
reducing total demand agricultural products or interrupt supply
chains
●
The economic decline (recession) caused by supply-side interruptions can be illustrated
using a production possibility curve (PPC)
Outward shifts of a PPF show economic growth and inward shifts show economic decline
(recession)
Diagram explanation
● Economic decline occurs when there is any impact on an economy that reduces the
quantity or quality of the available factors of production as depicted by the movement A
○ One example of how this may happen is to consider how the Japanese tsunami of
2011 devastated the production possibilities of Japan for many years. It shifted
their PPC inwards causing economic decline
Consequences of Recessions
● The consequences of a recession depend on the severity and length of the recession.
E.g. The Great Depression lasted from 1929 to 1939 whereas some economies are in and
out of recession within a year
1. National output (rGDP) falls
2. More firms go bankrupt
3. Both unemployment and underemployment increase
4. Both exports and imports fall
5. Domestic and foreign investment by firms decreases/stops
6. Deflation may become an issue leading to even lower wage levels
7. Government spending on unemployment benefits increase
8. Opportunities for entrants to the workforce decrease (youth unemployment increases)
9. Governments may have to spend significant amounts of money to support the economy
which carries several major opportunity costs