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Economic Recession – Definition and Identification

Economic Recession – Definition and Identification

For years, Economists have been trying to accurately define several things, and recession is one of them. Several definitions of recession have been put forward by economists to clearly define ‘Economic Recession’.

However, the most accepted definition of recession in the context of formal and neoclassical microeconomics is the decline in the GDP (gross domestic product) of a company for more than two quarters.

Julius Shiskin, an economic statistician has suggested several smart rules to identify recession in a New York Times article published in 1975. The most accepted and effective among them was the two quarters down GDP rule. There are other economists who consider a 1.5% unemployment rise in twelve months as the most effective identification of recession.

Economists throughout the world have used different types of indicators and metrics to predict and measure the effect of recession. The global trends that indicate the onset of recession can be categorized in the following ways:

Stock market: The financial experts who are involved in strict financial analysis can identify the effects of recession faster than others. Recession can be identified with the sharp fall and unexpected decline in the stock market average performance. This is the time when investors should carefully invest their money so as not to incur any losses.

Unemployment and layoffs: Recession is also identified by an increased rate of layoff in the companies. The unemployment rate suddenly goes up and several people loose their jobs. Those who survive layoffs, are sometimes asked to take huge cut backs on their salaries. Companies also hire comparatively quite less in number, due to which very less jobs are created. It leads to one of the tough financial times, housing problems and credit troubles.

A downturn in real estate: The residential real estate activities generally grind to a halt during recession. The price of houses will stabilize or even decline.

Gas Price Hike: When you have to pay more at the pump, it is an indication of recession. The sudden hike in the price of gas may result in more and more people opting for the little hybrid cars. This is also a strong indication that recession is somewhere around the comer.

Moreover, increase in the price of gas means less driving and this subsequently means less spending. Again affecting GDP.
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