Recession and Economic tools

Recession and Economic tools

Recessionand Economic tools

TheGreat Depression that occurred between 1929 and 1939 was the longestlasting and deepest economic downturn or recessionthat the Westernindustrialized world has ever witnessed. In the U.S., the GreatDepression started once the stock market crashed in October 1929 asWall Street was sent into panic and pandemonium, and millions ofinvestors wiped out (Cole and Ohanian, 2001). The next few years sawinvestment and consumer spending drop, resulting to steep industrialoutput declines and soaring levels of unemployment with failingcompanies laying off workers. The Great Depression had reached depthsof despair by 1933 with about 15 million Americans losing jobs and acollapsing banking sector. President Franklin D. Rooseveltimplemented relief and reform actions that helped lessen the mostawful effects of this economic crunch in the 1930s. However, theeconomy did not improve fully recover until after 1939, as the WorldWar II reignited the American industry.

Likeit was during the 1930s, we’ve been facing price failures, a creditfreeze and massive bank runs since 2007. The economy is yet to fullyturn around from this recession with a recorded unemployment rate of1 percent deflation, 9.4 percent, commodity price collapse and bankfailures (Wolf, 2012). The most probable cause for any economicdepression or recession is the improper use of economic tools –supply, demand, costs, production relationships, benefits andpreferences –in describing and analyzing the market processes asindividuals allocate the scarce resources in satisfying the mostpossible wants.

Recessionis economic downturn when employment and output are falling for aperiod of not less than six months (Krugman and Wells, 2006). Factorsleading to recession include: people purchasing less, decreasedfactory production, mounting unemployment, unhealthy stock market, orplummeting personal income (Harris, Edward and Frank, 2012). Suchfactors, as well as opportunity cost, choice and scarcitycharacterize and cause an economy to being regarded as in recession.

Theeconomy’s choice factor is greatly impacted by recession. Theeconomy doesn’t exist all by itself it requires consumers to driveit through their wants. Essentially, the consumers and producersdrive the economy, and resources are brought into play at thisjuncture. Resources refer to anything which can be utilized inproduction such as labor, land, human capital and physical capital(Krugman and Wells, 2006). Resources enable producers to create theproducts, and the consumers to buy and use the products.

Supplyand demand plays a vital role in the relationship between theproducer and the consumer. Producers’ outputs as well as prices arehinged on the consumers’ will to buy the products. But what happenswhen resources suddenly become scarce and there’s shortage? How isthe economy affected?

Tostart with, when certain resources are scarce, their prices shoot up.In an attempt to recover losses, prices of resources which producersneed to buy to create products also increase. Essentially, the entireeconomic system flow and stability is thrown off. Scarcity leads totrade offs, which in turn results to opportunity cost, or somethingthat is given up. Scarcity of products means that producers will haveto pay more to acquire what they need, consequently forcing them toraise prices of goods consumers need, leading to individual choice.

Individualchoice is important to the producer as it is to the consumer. On onehand, producers must decide on what resource (not) to use, whatproducts (not) to create, quantity to be created, cost of theproduct, where to sell the product, etcetera. On the other hand,consumers have choices to make as well, like what to purchase, when,amount to purchase and where to purchase. Such individual choicesspill over to the domain of opportunity cost, and something has to begiven up so as to get a much valued product (or service).

Recessionsare characterized by business cycle contractions, i.e., generalslowdown of economic activities. Macroeconomic indicators such asGDP, investment spending, household income, capacity utilization,business profits and employment fall, while unemployment rate andbankruptcies rise. Recessions generally happen when there’s aprevalent drop in spending, normally caused by the bursting ofeconomic bubble or an adversative supply shock. Governments almostalways respond to economic downturn by implementing expansionarymacroeconomic policies like decreasing taxation, increasinggovernment spending and increasing money supply.


Cole,H., and L. Ohanian. &quotThe Great Depression in the United Statesfrom a neoclassical perspective.&quot Handbookof Monetary and Fiscal Policy159 (2001). Print.

Harris,Edward, and Frank Sammartino. &quotTrends in the Distribution ofHousehold Income, 1979–2010.&quot MeasuringEconomic Sustainability and Progress.Universityof Chicago Press, 2012.181-211.Print.

Krugman,Paul, and Robin Wells.&quotThe health care crisis and what to doabout it.&quotTheNew York Review of Books53.5 (2006).Print.

Wolf,Martin. &quotThe balance sheet recession in the US.&quotFinancialTimes19 (2012).Print.