Loading the player...
A:

According to the

National Bureau of Economic Research (NBER), recession is defined as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production and wholesale-retail sales". More specifically, recession is defined as when businesses cease to expand, the GDP diminishes for two consecutive quarters, the rate of unemployment rises and housing prices decline.

Many factors contribute to an economy's fall into a recession, but the major cause is inflation. Inflation refers to a general rise in the prices of goods and services over a period of time. The higher the rate of inflation, the smaller the percentage of goods and services that can be purchased with the same amount of money. Inflation can happen for reasons as varied as increased production costs, higher energy costs and national debt. (For more on this topic, see All About Inflation.)

In an inflationary environment, people tend to cut out leisure spending, reduce overall spending and begin to save more. But as individuals and businesses curtail expenditures in an effort to trim costs, this causes GDP to decline. Unemployment rates rise because companies lay off workers to cut costs. It is these combined factors that cause the economy to fall into a recession.

For further reading, see Recession-Proof Your Portfolio and Recession: What Does It Mean To Investors.

This question was answered by Chizoba Morah.

RELATED FAQS
  1. Why does unemployment tend to rise during a recession?

    Learn what a recession is, some attributes of an economy in a recession, and why the unemployment rate tends to have a domino ... Read Answer >>
  2. What does it mean if something is described as "recession-proof?"

    Learn about the attributes of a recession, including the definition of a recession-proof item and examples of recession-proof ... Read Answer >>
  3. Is cyclical unemployment always due to recessions?

    Learn about the mechanisms that cause cyclical unemployment and find out about the role recessions and downturns play in ... Read Answer >>
  4. How do financial markets react to recessions?

    Learn more about the relationship between recessions and financial markets by identifying the fundamental characteristics ... Read Answer >>
  5. What are the three major economic components necessary for stagflation to occur?

    Dig deeper into the three components of stagflation -- inflation, unemployment and declining output -- as understood by economic ... Read Answer >>
  6. What causes recessions?

    Learn more about possible explanations of recessions in the business cycle, including how individual firms react to changing ... Read Answer >>
Related Articles
  1. Economics

    What Causes A Recession?

    Many factors contribute to a recession, but the biggest one is inflation.
  2. Active Trading Fundamentals

    Recession: What Does It Mean To Investors?

    Understanding the business cycle and your own investment style can help you cope with an economic decline.
  3. Personal Finance

    Recession And Depression: They Aren't So Bad

    Financial downturns are part of the economic cycle and may have important long-term benefits.
  4. Economics

    The Delicate Dance of Inflation and GDP

    Investors must understand inflation and gross domestic product, or GDP, well enough to make decisions without becoming buried in data.
  5. Bonds & Fixed Income

    Tips For Recession-Proofing Your Portfolio

    Find out what to do when the sun sets on a burgeoning market.
  6. Fundamental Analysis

    Do Declining Corporate Margins Point To Recession in 2016?

    Learn how declining profit margins have foretold nearly every recession of the past 50 years, and analyze whether they may signal economic contraction in 2016.
  7. Economics

    4 Countries in Recession and Crisis Since 2008

    See which major world economies haven't recovered from the global recession in the early 21st century, including a long-stagnant industrial power in Asia.
  8. Economics

    Industries That Thrive On Recession

    Find out where to turn when looking to invest in a tumultuous market.
  9. Options & Futures

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  10. Economics

    What Big Data Can Tell us about the Economy

    Given recent market turbulence, it’s no wonder that investors are wondering whether the economy is heading in the right direction.
RELATED TERMS
  1. Recession

    A significant decline in activity across the economy, lasting ...
  2. Business Cycle

    The fluctuations in economic activity that an economy experiences ...
  3. Recession Resistant

    An entity which is not greatly affected by a recession. Recession ...
  4. Double-Dip Recession

    When gross domestic product (GDP) growth slides back to negative ...
  5. Inflationary Gap

    A macroeconomic condition that describes the distance between ...
  6. Economic Cycle

    The natural fluctuation of the economy between periods of expansion ...
Hot Definitions
  1. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  2. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  3. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  4. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  5. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  6. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
Trading Center