SO WHAT CAUSE ECONOMIC RECESSION ?
This question has always been the subject of in’tense debate of economists. Due to the
multitude of e’xogenous factors involved in economic development, it is difficult to identify
the specific cause. Based on the information that our group has obtained, the cause of
economic downturn is viewed in 3 aspects: From economic schools, from the reality and
from the chart.
We will go through a few reasons according to the different economic schools:
- According to Keynes, Marginal Propensity to consume increases as national income
increases. That also makes savings in the economy increase. On the other hand, when
people increase their savings, it leads to a decrease in total demand.
And this decreasing in total demand causes recession, economic crisis, shrinking
production and unemployment of workers.
- The Austrian school of economics pointed out that the causes of the economic
downturn was government intervention in the market. According to this school,
economic recession comes from er’roneous economic plans of individuals, it can be a
business plan or a consumption plan. When all plans are wrong, a recession is created.
In order for individual plans to become false, there must be intervention and only the
government has the power to inter’vene in the direction of the market.
- Besides, the monetary school’s view that economic recession is the result of poor
money management, they criticize the intervention of government in the market.
According to them, the market is inherently self-regulating, when there is
government’s intervention in monetary policy that makes the total demand become
more fluctuating.
So, when considering from reality, how do exogenous factors affect
Financial crisis
This is an important factor and a major cause of economic downturns. A financial crisis in
one country will spread quickly to other countries due to the globalization of the financial
system. It's also the cause of global reduction all over the world.
For example: In 2008, the U.S. financial crisis quickly spread to other countries in the short
term.
The price of input materials increased dramaticly
Rising prices of input materials cause output prices to increase, while the increase in income
does not keep up with the increase in prices, which also leads to a decrease in total demand.
A decrease in total demand will once again have the opposite effect on total supply.
For EX: The recession of oil prices in the Middle East in the period of 1973-1975
War
One reason does not seem to affect much, but it is the cause of the sudden increase in the
price of raw materials
in addition to the above factors, there are also neutral factors such as the mistake in the
administration of macroeconomic policy or people's expectations and the crisis of trust.
Finally, we'll take a look at the issue through the following charts. Who have seen
these chart before ? Yes, we have learned this through micro-economics and
macroeconomics.
The cause of the recession is
AD total demand line plummets
due to:
- Reduce spending and investment
- Reduce food
- deflation
- reduced export demand
- increased imports
AS supply line plummets because
-Inflation
-decrease in output
These reasons led to a sharp decline in GDP, and a recession happens.
