Recession Definition Economics

Learn the recession definition Economics, which impacts employment, production, retail sales, gross domestic product, and consumer income.

The Recession Definition Economics

In economics, recession is the downturn of the business cycle, in which economic activity generally decreases. The business cycle describes how the economy cycles between periods of expansion and contraction. At some point during the cycle, one of the above-mentioned phenomena halts economic expansion.

The economy goes into recession, then has a brief rebound, followed by another downturn, then another recovery. The end of the recession is marked by a time when the economy begins growing again, rather than a return to the economy’s pre-recession initial position. A recession begins shortly after an economy has reached its activity peaks, and ends when an economy has reached its economic trough.

A recession is an economic decline in the country’s output, accompanying declines in incomes and employment. A recession is an economic downturn significant enough to impact employment, production, retail sales, gross domestic product, and consumer income.

The National Bureau of Economic Research

In determining if there has been a recession, the non-profit National Bureau of Economic Research does not just look at gross domestic product, but also looks at various indicators, such as employment, consumer spending, retail sales, and industrial output. Experts declare a recession when the national economy experiences a decline in gross domestic product (GDP), rising levels of unemployment, declining retail sales, and declining measures of income and production over a sustained period. While gross domestic product (GDP) is the broadest measure of economic activity, the oft-cited definition of recession involving two consecutive quarters of negative GDP growth is not the official designation.

Pundits typically categorize a recession as two straight quarters of declining GDP growth, but other significant factors, such as inflation, employment, and other economic recession indicators, need to be considered. While some argue that two straight quarters of falling real GDP is a recession, this is not an official definition or how economists assess the status of the business cycle. Instead, both official definitions of recessions and economists assessments of economic activity are based on an integrated view of data–including the labor market, consumer and business spending, industrial output, and incomes.

The Bureau of Economic Analysis can adjust its estimates of actual GDP in subsequent reports, so determining whether a recession is underway just by looking at GDP is hard. That is because the monthly data has to be analyzed, and the business cycle dating committee has to agree it indicates recession. The decline is tracked by economists, and a recession is declared only after a recession has ended by the National Bureau of Economic Researchs Business Cycle Dating Committee.

The NBER, the agency that officially declares recessions, says that two straight quarters of falling real GDP is no longer the way to define recessions. People frequently refer to two straight quarters of GDP declines as defining recessions, and countries such as Great Britain use that label, but that is not the official label in the United States, according to the U.S. Office of Economic Analysis, the federal statistical agency that is independent. It is not quite the exact definition that Great Britain uses, and there is usually a lag time before recessions are declared, since data on GDP has time delays.

Yes, there is an official definition of a recession — and the official definition is not two straight quarters of falling GDP. Several Verify readers reached out asking what makes up a recession, and whether there is an official definition.

Numerous economic theories

Numerous economic theories have attempted to explain why and how an economy can deviate from a long-term growth trend in an economy, into a temporary recession. As prices rise and GDP falls, many worry about a potential economic slowdown, also known as recession.

A recession is a major economic contraction, spreading throughout an economy, lasting longer than several quarters. The NBER defines recessions as significant decreases in economic activity that are spread throughout the economy, lasting more than a few months, typically seen in real GDP, real income, employment, industrial output, and wholesale-retail sales. Key Takeaways A recession is a period of declining economic performance throughout an entire economy lasting a few months.

A recession, in economics, is a downward trend in the business cycle, marked by declining output and employment, which in turn causes household incomes and spending to fall. Recessions are considered a part of the natural business/economic cycle of expansion and contraction. Recessions are considered a necessary part of the business cycle — or regular rhythm of expansion and contraction — experienced by a nations economy.

Spikes in Economies

Just as businesses go through phases of growth and contraction overall, known collectively as their business cycles, economies too go through spikes, marked by high expansions and employment, and inescapable valleys, the periods of contraction known as recessions. A recession has a number of attributes, all of which may occur at the same time, and includes a drop in component measures of economic activity (GDP), such as consumption, investment, government spending, and net exports. Recessions generally result in a drop in economic output and investment, lower profits for businesses, and higher unemployment.

During a recession, the economy struggles, people lose jobs, businesses make fewer sales, and overall economic output of the nation falls. In simple terms, recessions are decreases in economic activity, meaning that the public has stopped buying products for some time, and this may lead to the decline in GDP following an economic expansion period (a period when products became popular and the income profits for businesses became larger).

Serious Recession

A serious recession (down 10% in GDP) or one which is long lasting (three to four years) is called an economic depression, though some would say that the causes and treatments may differ. To understand the macroeconomic variables that make up a recession, it is important to recognize the link between recessions and business cycles, says Giacomo Santalego, PhD, senior professor of economics at Fordham University.

The NBER definition is better at defining a recession than the fall in GDP alone, Alan Gin, professor of economics at the University of San Diego, told Verify.

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