What are the Causes of Economic Recession?

We all have heard our economy is recovering from the recession gradually and so are the other countries around the world. However, not many people know what the real causes of economic recession are, we recently witnessed.


What is a recession anyway?

Recession is a period in which the gross domestic product of a country shows a negative growth for few months, generally couple of quarters. A shorter period, however, is considered to be an economic correction. When this shorter period is prolonged, it’s termed as a recession.
Causes of Economic Recession

There are several reasons why an economic recession occurs varying from simple to intricate. Let’s, however, start with the simple first.

Lesser Purchases:


When the overall purchase or consumption of products falls below a predefined level, a situation of crisis arises. This may happen due to excess production of goods or fall in consumer consumption. In either case, supply is much greater than the demand. This eventually compels companies to raise prices and cover their losses, which in turn, makes people repel even further, resulting into an economic recession.


When the overall purchase or consumption of products falls below a predefined level, a situation of crisis arises. This may happen due to excess production of goods or fall in consumer consumption. In either case, supply is much greater than the demand. This eventually compels companies to raise prices and cover their losses, which in turn, makes people repel even further, resulting into an economic recession.

Fall of Few Sectors:


A recession usually starts with a collapse in a certain sector, like mortgage or real estate in our case. More and more people acquired sub prime loans to purchase home. This increased demand led prices to skyrocket. There was a drastic fall in price, however, due to increased supply. People found it worthless to repay mortgages that were now quite higher than the actual price of the house. Hence, they opted not to pay. This led banks to fall, and eventually the economy.

Similarly, an economic recession is generally an outcome of poor performance of couple of sectors, which is followed by a chain of crisis.

Over Consumption:


This is one of the most significant causes of economic recession. Over spending can result in accumulation of huge debt. Many government encourage spending, up to a limit however, as once it exceeds, people start spending their savings and keep borrowing more, leading the whole economy into debt.

Faulty National Policies:


Sometimes, recession can also be an effect of faulty policies set by governments of a nation. Take the above case for instance. If government encourages spending beyond limit, a recession is inevitable.

There are several reasons why an economy slips into a recession and it can happen quickly. However, the hardest part is recovery.

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