Causes & Consequences of Recessions (CIE IGCSE Economics)

• A recession is a period of at least six months (2 quarters) of economic decline which 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. consumption fell 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 & consumers e.g. The Russian war on the Ukraine has reduced the supply of natural gas, oil & petrol resulting in major disruptions & increased energy costs
   

Factors That Reduce Total Demand & Total Supply

Demand-side Factors

Supply-side Factors

A fall in consumer confidence reduces consumption A fall in business confidence reduces investment Increasing levels of unemployment reduce consumption Decreasing levels of government spending Increased interest rates require borrowers to repay higher amounts on their loans - this reduces discretionary income which reduces consumption Shocks to other economies can reduce demand for a country's exports thus reducing total demand

Unexpected supply shocks such as the war on Ukraine or the Japanese Tsunami of 2011 A gradual decline in the productive capacity of the economy when capital (machinery) grows old & is not replaced A gradual decline in the level of education/training available in an economy On-going industrial action such as worker strikes which disrupt the supply of labour to an economy Weather events which destroy 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 & 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

• The consequences of a recession depend on the severity & length of the recession e.g. The Great Depression lasted from 1929 to 1939 whereas some economies are in & out of recession within a year

1. National output (rGDP) falls
2. More firms go bankrupt
3. Both unemployment & underemployment increase
4. Both exports & imports fall
5. Domestic & 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