Assignment -1

WHY DO NOT PRICE DECLINE DURING RECESSION?

INTRODUCTION

During the time where our economy is booming the prices of things commonly rise due to the amount of money that is on the market. People have more money to spend, so they are inclined to pay higher prices for items so would not it make sense that while a recession prices for many items should go down? However this does not occur & during a recession prices usually stay the same rise to as lower degree than during economic boom. Why this? It may not seem like it but it is merely a matter of supply & demand. One of the most basic economic principles is that of supply & demand. As demand goes up outpace the supply available .Such as in an economic expansion, prices do not go down during a recession. Many consideration affect prices of goods & services in capitalist economy.

Four basic factors that affect the level of prices are

Supply of money

Supply of goods

Demand for money

Demand for goods

During a boom, we expect the demand for money & goods to both group & supply to go down. Because of this expectation one would initially assume that in a time a of economic down turn that the opposite would occur however this is merely true.

The main thing to reminder when considering inflation is that it does fall during recession. However it willnewver go below zero & experience any sort of deflation because of the ever increasing supply of money. Recessions are periods of time when people become afraid that they will not have enough money to live the way that they are used to living or that a pending recession most certainly means that they will loose the money that they have worked so hard to earn. It is true that for many people a recession brings unfortunate news and some cuts to the job market which could mean the loss of jobs and the stagnation of business growth. But you must remember that although a recession may make these unfortunate events more likely, they are not guaranteed and certainly not everyone will be directly affected. In fact some areas of the market see no effect at all.

MEANING OF RECESSION

A recession as the time when business activity has reached its peak and starts to fall until the time when business activity bottoms out.

DEFINITION OF RECESSION

The definition of a recession is a decline in a country's gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year. A recession may involve declines at the same time in the measures of overall economic activity such as employment, investment, and corporate profits. Recessions may also be a combined with deflation, or, alternatively, sharply rising prices or inflation. An economic depression is a severe or long recession.

Feature of recession

A recession in economics is defined by a period of at least 2 quarters of negative gdp.A recession is caused by fall in GDP,

Recession tend to lead to reductions in confidence which can further reduce consumption or investment spending

In recession, however govt tend to borrow more money which leads to increased public spending in an attempt to offset the reduction in consumption or investments.’

Sometimes recession is caused by reduction in exports which may be due to a world recession.

This should lead to reduction in exchange rates which would reduce the price of exports.

Why do not prices fall during a recession?

The reason we can have both recession & inflation is because wages are “sticky” & normally people do not accept lower wages in a time of recession.

The prices for most goods & services will also stay the same in early stages of recession.

CAUSES OF RECESSION

Many factor contribute to an economy‘s fall into recession but the major cause is inflation. Inflation refers to general rise in price of goods & services over period of

Time. The rise rate of inflation, smaller the % of goods & services that can be purchased with the same amount of money, inflation can happen for reason as varied as increased production cost, higher energy cost & national debts.

IMPACT OF RECESSION

Saving in a recession private sector saving tends to rise. This is because people become more nervous to spend .The specture of unemployment encourages people to save more & spend less.

Consumption will tend to fall because people are worse off.

Government spending in recession government have to spend more unemployment benefits.

CONCLUSION

For many the best advice for how to invest during a recession is simply to not be afraid of the perceived risks. Investing is risky no matter what the market is doing. Some people can make a lot of money in the stock market, while others play it safe, invest over the period of a few years and end up with just a little more money than what they started with. The fact that we are or are not in a recession simply changes the details of investing, not the fact that you should or should not continue your financial planning strategy.

Submitted To: - Gurdeepak Singh

Submitted By :- Rupinder Kaur MBA 1st (A)