Recession and Depression Term Paper Example | Topics and Well Written Essays - 1500 words

Recession and Depression - Term Paper Example In times of recession, gross domestic product is negative and this is accompanied by a decrease in investment, and an increase in rates of unemployment (Schumpeter,1939). Recession normally occurs for a short period of time. Hansen (1941) noted that high rates of unemployment are witnessed during recession. His argument is that during this period, a large proportion of the population is unable to secure jobs. The reason behind this is a decline in profits made by firms and this hinders expansion thus fewer job opportunities. As a result, there are low living standards and individuals are faced with difficulties when it comes to catering for their basic needs. Poor standards of living are in most cases witnessed by those who depend on wages and salaries. Lack of employment cause insecurity and this discourages investors from risking their money by investing in any kind of a business. Due to the high rates of inflation during recession, there is reduction in investments. This is primar ily because firms fear to set up investments because of the depreciating value of the currency. In the earlier stages of recession, there is a fall in productivity then productivity will increase as firms that are weaker close. Low investments by business firms mean a reduction in the amount of revenue from taxation of the businesses and individuals who could have been employed by investors. Government income will therefore reduce remarkably and there will be fewer funds to cater for the government expenditure. High interest rates during recession serve to discourage borrowing from banks. This will reduce the amount of money in circulation; inflation will therefore reduce. Recession causes a decline in the gross domestic product and this results to a decline in exports since the amount of goods being produced in the country is low. Recession erodes the confidence of consumers reducing the consumption rate. As a result, the recovery period will be lengthened. This occurs during sever e recession periods. There are also increased individual and corporate debts. The prices of assets such as homes and financial assets also reduce significantly. There is an increase in the amount of government debts during recession. This is caused by a reduction in the amount of government revenue from taxation. Recession forces governments to borrow money from lending agencies such as the international monetary fund. The amounts of funds being generated from within the country are not sufficient to finance the activities of government institutions. Low productivity during the early stages of inflation will cause a reduction in the amount of products that are available for supply. This will lead to high demand for products and therefore prices will go up. Consumers will be forced to spend an extra amount of money to purchase goods. High prices may lead to inability to afford necessities. Business people will hoard goods causing scarcity of commodities in the market. In times of rec ession, there is high prevalence of inflation and as a result people will reduce the amount of money they spend on leisure and they will start saving more money than they are use to saving. People are forced to increase their budgets and spend more on commodities due to the high cost of living. The end of recession is marked by a decline in the rates of unemployment. At the end of this