What causes a recession?

By Chizoba Morah AAA
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 inflation increase with GDP growth?

    Examine the relationship between inflation and GDP, and why GDP growth leads to higher prices. Explore the effects of uncontrolled ...
  2. How did World War II impact European GDP?

    Understand the effect of World War II on the European gross domestic product and what foreign and domestic factors influenced ...
  3. What methods can the government use to control inflation?

    Find out what inflation is, what a government can do to control it, and how the results of those actions help or hurt the ...
  4. What's the difference between hyperinflation and inflation?

    Learn the difference between inflation, which can be a normal part of economic fluctuation, and potentially economy-killing ...
RELATED TERMS
  1. Asset Liquidation Agreement (ALA)

    A contract between the Federal Deposit Insurance Corporation ...
  2. Capital Loss Coverage Ratio

    The difference between an asset’s book value and the amount received ...
  3. Gross Cash Recovery (GCR)

    The gross cash colloctions expected over the remaining life of ...
  4. Initial Targeted Cash Value

    The gross amount of collections expected to be obtained through ...
  5. Liquidation Differential

    The loss in value of an asset after it has been placed in receivership ...
  6. Asset Management and Disposition Agreement (AMDA)

    A type of contract between the Federal Deposit Insurance Corporation ...
Related Articles
  1. Economics

    The New Global Banking Regulations To ...

  2. With the second-largest economy in the world, China has significant (and growing) influence on the global economy. But how is that impact figured?
    Economics

    A Look At China's Growing Influence ...

  3. Quantitative easing in Europe is coming, but too slowly to avert a severe slowdown and perhaps even a hard landing.
    Economics

    How Is Europe Affecting The Martkets?

  4. If you're considering investing in China and want to know when to buy, sell, hold or stay away, consider these economic indicators.
    Economics

    Eyeing China? Consider These Economic ...

  5. Economics

    How A Limited Government Affects A Country's ...

Trading Center