RECESSION

A recession occurs when the level of production declines, unemployment rises and consumer
spending falls. It is shown by a negative rate of growth that is, real GDP is negative

1. A fall in the production of goods and services

2. Unemployment and the possibility of future retrenchment

3. Lower income

4. Decrease in investment

5. Closure of companies especially small ones

6. Increase in poverty

7. Decrease in the standard of living

Policies to remove a recession

Expansionary Monetary policies

Monetary policies are implemented through the central bank by altering the rates of interest and
changing the money supply in the economy

1. Lowering the reserve requirement ratio (RRR)

Lower the reserve requirement ratio

This refers to a fraction of deposits commercial banks are required to deposit to the Central
Bank. The Central Bank has the right to set the RRR of commercial banks.

If the RRR is lowered from 10% to 5% this will happen:

1. Commercial banks will have to deposit LESS money with the central bank

2. Commercial banks will now have MORE money available for lending

3. This results in a fall in the ROI which means savings would be discouraged and borrowed
encouraged. Overall, spending in the economy rises.
4. As spending rises, firms hire more FOPs to produce more goods and services, thus production
rises and unemployment falls. Households earn factor incomes which generates further spending
in the economy

Explain how the following policies may be implemented to reduce a recession:

(i) ​ Open market operations

(ii) ​ Discount rate

Expansionary fiscal policies

Fiscal policies use the government's budget of taxes and government spending.

Aim is to encourage spending in the economy

Personal Income taxes

The portion of income earned by workers that is paid to the state. All income earners are given a
tax free personal allowance

Lower personal income taxes results in more disposable income for the consumer to spend on
goods and services

As spending rises, firms hire more FOPs to produce more goods and services, thus production
rises and unemployment falls. Households earn factor incomes which generates further spending
in the economy. As spending rises, firms hire more FOPs to produce more goods and services,
thus production rises and unemployment falls. Households earn factor incomes which generates
further spending in the economy

Government spending

Current and capital expenditure spent by the government.

An increase in government expenditure/spending results in households earning factor incomes

which results in spending in the economy

As spending rises, firms hire more FOPs to produce more goods and services, thus production
rises and unemployment falls. Households earn factor incomes which generates further spending
in the economy
Corporation taxes

Tax on the profit of firms

If corporation taxes are lowered, firms will pay less compulsory payments to the government

The firm now has more money available to reinvest in the business and expand production

As production increases, firms hire more FOPs to produce more goods and services, thus
production rises and unemployment falls.

Households earn factor incomes which generates further spending in the economy
 Economic development

Refer to chapter 27 in your text.

Economic development refers to the improvements in the structure of the economy that will
change it from a primitive agricultural based economy to one an industrial one so that economic
wellbeing increases in the long run

Factors that determine economic development:

1. Investment in technology

2. Improvement in infrastructure

3. Improvement in physical capital

4. Investment in human capital

Economic development has a range of indicators:

Non-economic factors are considered in order to measure development

1. Percentage of population with a reliable supply of electricity and water

2. Increases in real GDP per capita overtime (economic factor)

3. Life expectancy

4. Economic structure of the population, that is, % of dependents versus the % of the labor force

5. Increases in the human development index (HDI)

The HDI as measured by the United Nations development program (UNDP) uses the following
factors:

A. real GDP per capita

​ B. life expectancy at birth in years

​ C. education and literacy rates

HDI more than 0.8: High human development countries

HDI between 0.51 and less than 0.79: medium human development countries

HDI less than 0.5: low human development countries

Developed and developing countries

A developed country is one that enjoys a high standard of living derived through an
industrialized, diversified economy. These countries usually have a very high HDI

A developing country is a country where people are faced with a relatively low standard of
living, that is, countries with a low to medium HDI

Characteristics of a developing country :

○​ Low GDP per Capita: Developing countries typically have a lower Gross
Domestic Product (GDP) per capita, indicating a lower average income level for
their citizens compared to developed nations.
○​ Shortage of Capital: Developing countries often face challenges in accumulating
sufficient capital for investment in infrastructure, technology, and other economic
development projects, limiting their overall economic growth.
○​ Increasing Unemployment: Unemployment rates tend to be higher in developing
countries, reflecting challenges in providing adequate employment opportunities
for their growing populations.
○​ Budget Deficit: Many developing countries experience budget deficits, where
government expenditures exceed revenues. This can constrain the government's
ability to fund essential services, infrastructure, and development programs.

Briefly explain the following indicators of a developing country​

​ (a) ​ Low GDP per capita (b) ​ Shortage of capital ​ (c) ​ Increasing
unemployment ​ (d) ​ Budget defecit

Briefly explain the following social indicators of a developing country:

​ (a) ​ High dependency ratio ​ (b) ​ Low life expectancy

​ (c) ​ Low literacy rate ​ (d) ​ Human and physical resources.

Measures government should examine in attempting to achieve economic development:

(a) Industrialization:

●​ Developing manufacturing and service industries is crucial for economic development.

●​ Many developing countries adopt an import substitution strategy, aiming to replace
imported manufactured goods with locally produced ones.
●​ Industrialization can also focus on export-oriented industries, producing goods and
services for large-scale export.

(b) Increasing Rate of Capital Formation:

●​ Providing the labor force with better tools and equipment enhances labor productivity,
leading to higher output.
●​ Capital accumulation can be achieved by:
○​ A. Encouraging domestic savings.
○​ B. Encouraging foreign investors through lower taxes for foreign companies in
developing countries.

(c) Population Control:

●​ Keeping the population growth rate low is essential for individual income and a better
standard of living.
●​ Promoting family planning is a key component of an overall development strategy.

(d) Raising Literacy Rates:

●​ Government emphasis on basic education is crucial for improving literacy rates.

●​ Increasing expenditure on education is necessary to enhance the overall literacy levels of
the population.

(e) Agricultural Reform:

●​ Acknowledging that many developing countries are agriculture-based, economic

development strategies must include agricultural reform.
●​ Modernizing agricultural production is vital for raising productivity and increasing output
in the agricultural sector.