Econ: Extreme Economic Conditions


recession-or-depression-cartoon-3A recession is the contraction phase of the business cycle. It begins after the economy reaches a peak of activity and ends as the economy reaches its trough. The National Bureau of Economic Research (NBER) describes a recession as a period of decline in total output, income, employment and trade, usually lasting six months to a year and marked by widespread contractions in many sectors of the economy. A common rule of thumb for recessions is two quarters of negative GDP growth. On the other hand, a depression is a prolonged period of economic recession marked by a significant decline in income and employment. Depressions are caused by the same factors that lead to a recession. The National Bureau of Economic Research decides when recessions occur, but there is no widely accepted definition of depressions. A common rule of thumb that some people use is a 10% decline in economic output as measured by the gross domestic product (GDP). Before the Great Depression, all economic downturns were called depressions. After the Great Depression, the term recession was used to describe downturns so that people wouldn’t remember the terrible time that they had during the Great Depression.

hyperinflation-in-zimbabwe-4-638Hyperinflation, the worst degree of inflation, is a situation in which inflation is increasing at a rate of several hundred percent a year. Hyperinflation can result in complete economic collapse. After Germany lost World War I, it was forced to pay heavy reparations to the victorious countries. Germany tried to pay this debt simply by printing more money. By November 15, 1923, it took 4.2 trillion marks (German currency) to equal the value of one U.S. dollar. Meaning that the mark was worth so little that even the paper on which it was printed had greater value.

stagflation-graphicStagflation is a combination of economic stagnation or slowdown and high inflation. During a period of stagflation, gross domestic product growth is slow or zero, unemployment is high, and prices are rising. Early in the 1970s, the economy received a shock when the Organization of Petroleum Exporting Countries (OPEC) imposed an oil embargo on the United States and other oil importing countries. Supplies of oil dwindled, driving up the price of gas. The inflation rate, which had already reached worrying levels, soared into double digits. As the economy struggled with rising prices, business activity slowed and the unemployment rate climbed.

deflationary spiralA decrease in the average price level of all goods and services in an economy is known as deflation. Deflation may occur when aggregate demand decreases more rapidly than aggregate supply. In such situations, sellers are forced to lower prices to attract buyers. As price decreases, the amount a dollar buys increases. Therefore, deflation boosts the real purchasing power of the dollar. The most prolonged and most recent deflationary period in U.S. history occurred during the Great Depression, when high unemployment coupled with reductions in wages caused aggregate demand and prices to fall.

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