Transcript Before, understanding “Recession”, we need to understand the market economy; A] TWO STAGES OF MARKET ECONOMY B] TWO FACTORS OF MARKET; - DEMAND &

Before, understanding “Recession”,
we need to understand the market
economy;
A] TWO STAGES OF MARKET ECONOMY
B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY
A] TWO STAGES OF MARKET ECONOMY
A1] Growing Market Economy
A2] Declining Market Economy
A1] Growing Market Economy
Starting Point = Willingness to buy
A2] Declining Market Economy
Starting Point = Unwillingness to buy
B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY
Producer wants his demand always to be high
Consumer wants his buying cost always to be low
Actually, Demand is the price at which
consumer is ready to buy and
producer is ready to sell;
Producer Price
Consumer Price
Usually, we think;
Demand = Quantity
But, here Demand = Price;
This is because,
Price decides the Quantity of Sales;
Competitive Price = More Demand;
In competitive Price = Less Demand;
C] What is Recession?
Recession is the economy shrinking for two
consecutive quarters (=6 months) with a
decrease in the GDP (=Gross Domestic Product)
GDP = Value of all the reported goods and services
produced by the people operating in the country
GDP = MONEY VALUE OF {C + I + G + (X – M)}
C = Consumables, I = Gross Investments, G = Government Spending,
X = Exports, M = Imports
C] What is Recession?
GDP is a good indicator of economy; Other
indicators could be;
-Unemployment Rate
-Consumption Rate
-Actual Personal Income
-Etc..
If GDP is growing, then market is growing due to
increased demand;
C] What is Recession?
GDP is a good indicator of economy; Other
indicators could be;
-Unemployment Rate
-Consumption Rate
-Actual Personal Income
-Etc..
If GDP is growing, then market is growing due to
increased demand;
Note: If the recession continues for next quarter, (>6
months) then we go through “DEPRESSION”
Economy;
C] What is Recession?
There is a joke that economists quote to explain the
Difference between “Recession & Depression”
RECESSION
= WHEN YOUR NEIGHBOR LOSES HIS JOB
DEPRESSION
= WHEN YOU LOSE YOUR JOB
D] What is a Business Cycle?
What goes up; Has to come
down;
Growing economy has to
come down if the
production
rate of goods & services was
more than the actual
consumption;
E] Why Recession happens?
E1] OVER
PRODUCTION
E2] LOW
CONFIDENCE
LEVEL
E] Why Recession happens?
E1] OVER
PRODUCTION
PSEUDO DEMAND
ACTUAL NEED WAS
NOT THERE;
WRONG PROJECTIONS
COMPANIES
PRODUCED
MORE
A situation in which the
supply exceeds the nation’s
ability to consume what has
been produced;
Supply > Demand
E] Why Recession happens?
E2] LOW
CONFIDENCE
LEVEL
E2.1] Word of mouth
E2.2] Assignable Cause
E2.1] Word of mouth
Low Confidence Level
of Millions of
consumers and
producers after they
hear many job cuts,
Demand coming down,
Companies’ bankruptcy,
etc
Consumers are fearing that they may
lose their jobs; So, they have less
confidence to spend money and buy
goods; This will result in reduction
in demand in the market; Consumers
start saving money instead of spending
money; This is a downward spiral in
the economy;
E] Why Recession happens?
E2] LOW
CONFIDENCE
LEVEL
E2.1] Word of mouth
E2.2] Assignable Cause
E2.1] Word of mouth
Low Confidence Level
of Millions of
consumers and
producers after they
hear many job cuts,
Demand coming down,
Companies’ bankruptcy,
etc
Consumers
fearing
that
they may
Producers are
do not
stock
materials,
they
lose
theirtheir
jobs;productions,
So, they havegets
lessinto the
reduce
confidence
to spend
money
and buy
cost reduction
activities,
worried
about
goods;
This will result
the profitability,
etc…in reduction
in demand in the market; Consumers
start saving money instead of spending
money; This is a downward spiral in
the economy;
E] Why Recession happens?
E2.2] Assignable Cause
Bad Incidences Happening;
Example: September 11 Terrorist Attack in US;
International Airport block in Thailand;
Mumbai Attacked in India;
etc…
Series of such incidences
leading into a kind of War
Please see next slides, for details on business impact;
Terrorists’ Attack on 11th September in US
Created fear in people
People cancelled their travel plans
Resulted in low occupancy rates
Airlines & Hotel Industries badly hit
Airline & Hotel Industries offered discounts,
gift coupons, to attract people
But, still, no improvement in occupancy
rate
Airline & Hotel Industries started
“Cost Reduction” activities
CONTINUED
IN NEXT SLIDE
Terrorists’ Attack on 11th September in US
Airline & Hotel Industries started
“Cost Reduction” activities
i] Reduce No. of flights
ii] Lay off people
iii] Salary reduction to
“Not laid off people”
In flight meals reduced
Low or No income to
spend and buy goods
They became careful due
to the fear of loss of job
Meals supplying company
got the hit
Demand for other goods
come down
Started saving money
instead of spending
Catering company now,
lays off people
Demand for other goods
come down
So, you can see how the hit on Airline and Hotel
industries can affect “Un-related” industries
in the end;
One industry can hit many other industries when the
confidence level of millions of consumers & producers
drastically comes down;
F] How to know recession?
Indicators to say a nation is in recession;
- People buying less stuff
- Decrease in factory production
- Growing unemployment
- Slump in personal income
- An unhealthy stock market
G] How to come out of recession?
It is unhealthy for any nation to be in Recession;
So, Government will take certain countermeasures
to eliminate or reduce the Effect of recession for turnaround;
Important Point:
Today, it is a market Economy
Producers;
Consumers;
Can produce and
sell at their prices
Can decide to
buy or not;
Both Producers and Consumers are free to act; Not a forced action
G] How to come out of recession?
Hence, Government does not have direct control on Producers’ & the
Consumers’ behavior; But, they can influence millions of Producers &
Consumers with Government’s policies;
Government has 2 plans
Fiscal Policies
Monetary Policies
(By Govt.)
(By SBP)
Government influences the
economy by changing how
it (Government) spends
and collects money
RBI manipulates
the available supply of
money in the country
G] How to come out of recession?
Fiscal
Policies
Government influences the economy by changing
how it (Government) spends and collects money
1] Tax cuts for
businesses or
for individuals
More money
available for
spending
2] More Spending
by Govt. to
create jobs
Individuals get
salary and spend
money
3] Automatic
fiscal policy;
Unemployment
Insurance
Some income to
unemployed
people to spend
Demand picks
up; Market
can recover;
G] How to come out of recession?
Monetary
Policies
Government manipulates the available supply
of money in the country
1] Reduce reserve
ratio
More money
available for bank
to give loans
What is Reserve Ratio?
Each bank has to keep a high % of their assets in
SBP (State Bank of Pakistan). These assets do not
earn any interest to banks. This money kept in
RBI is called “Reserves”; SBP sets certain ratio
of this reserves and it is called “Reserve Ratio”
Demand picks
up; Market
can recover;
G] How to come out of recession?
Monetary
Policies
Government manipulates the available supply
of money in the country
1] Reduce reserve
ratio
More money
available for bank
to give loans
2] Lower the
interest rates
Individuals take
more loan
Demand picks
up; Market
can recover;
G] How to come out of recession?
Monetary
Policies
Government manipulates the available supply
of money in the country
1] Reduce reserve
ratio
More money
available for bank
to give loans
2] Lower the
interest rates
Individuals take
more loan
3] Use its own
reserved
money to buy
Govt. bonds
It becomes an
income to Govt.
to inject money
into the market
Demand picks
up; Market
can recover;
I] WOW!!!!!!!!
RBI’s Power or Government’s Power is double-edged
sword; Sometimes, their policies to recover from recession
can be counter-productive and it may further worsen the
situation;
If we advise our people to save money, then, the multiplication effect is that
the demand will not pickup and recession will continue; Very peculiar!!!!! But, I
am not misguiding you; Just think from a macro level, if everybody in the
country stops spending, what will happen?
Nation’s recession is controlled by the actions of
everybody living
in that country;
I] WOW!!!!!!!!
Most of the developing
Economies like China,
India;
Currently,
Slow Down
Stage; Not yet
in Recession
GDP Growth
Rate Down; But,
Still expected to be
Around 6% in India
Most of the developed
Economies like US,
Japan, Germany, etc
Currently,
in Recession
GDP Growth
Rate Negative;
HOPING THIS TIME
RECESSION VANISHES
SOON SO THAT
INDIA GETS BACK
TO ITS STRONGER
GDP GROWTH RATE
OF 8% TO 10%
(THOUGH THE EXPERSTS
SAY IT WILL LAST TILL
Q3 OF 2009)