Activity for the 11B_A2 Students
World economy is facing a problem of second recession. Economic Growth is faultering in world's major economies. Growth forecasts have been downgraded for fast growing economies. Credit rating of developed economies are under pressure. Bond rates are rising, exchange rates are volatile and and signs of revival seems to be distant with business confidence are touching their nadir.
Present your views for the topics mentioned below with facts, references and in the light of theoretical evaluation: Maximum Marks allocation is 25.
1) Discuss the causes of the economic recession. Angelica
2) Discuss the consequences for the world economy as a result to second wave of recession: Eveline
3) Discuss the role of government in finding the way out of this recession. Jason
4) Evaluate the measure undertaken by the various governments. Chirskevin
Resource1 : OECD calls for urgent action to boost ailing global economy
Resource1 : OECD calls for urgent action to boost ailing global economy
A recession occurs when there is negative economic growth for 2 consecutive periods or there’s a fall in the GDP. There is also the case where economic growth is really low causing there to be job losses causing a growth recession. This recession is characterised by:
ReplyDelete- Lower output
- Lower investment
- Higher unemployment
- Lower inflation
A recession could occur due to:
- High interest rates. High interest rates would mean that there’s more cost to financing and borrowing causing less spending in the country which could result in lower aggregate demand causing a fall in the real GDP.
- Deflationary fiscal policy such as increasing tax and reducing government spending resulting in lower demand.
- Low level of confidence. When people have low level of confidence in the economy, they are afraid to take risk. So, when there’s a recession, they will reduce their level of spending and further decrease the aggregate demand.
- Due to low demand, production will be reduced thus creating lower output and higher unemployment. With less income, these people will also spend less and there would be less tax income for the government to finance their growth.
- Due to lower aggregate demand, there’s a fall in the real GDP.
The causes of this recent recession are mainly due to the euro area crisis and financial crisis in the U.S.
The euro area crisis poses a huge threat to the world economy. Fears of sovereign debt crisis continue to be widespread. Sovereign debt crisis refers to budget deficits that have been created by insufficient tax revenue and excessive spending.
This is closely related to the financial crisis in the U.S as many European banks held assets in financially troubled American banks and the need to help the banks has worsened the budget deficit for the governments. The size of the budget deficits has frightened investors, making them demand higher interest rates from governments. This in turn makes it difficult for governments to finance further budget deficits and service existing high debt levels.
There’s great fear that this crisis could affect other countries even though they have solid public finances and decisive actions have yet to be taken. If not handled properly it could have negative externalities in other countries posing an even bigger problem.
Another cause would be the tsunami that had struck Japan which causes there to be lower export and GDP in the world economy. There has been a contraction in Japan’s GDP due to the disaster.
Certain actions have been taken by the government, however it hasn’t been really effective. It is suggested that in order to solve this crisis, there would be a need to:
- A substantial increase in the capacity of the European Financial Stability Fund, together with a greater ability to call on the European Central Bank’s balance sheet.
- Government reforms to counter the moral decline.
- Credible medium fiscal programme in the United States. This would help the country to gain the finaces they need to get out of the recession and increase the people’s confidence.
So, to help prevent further decline in the economy, decisive actions by the government related will have to be taken.
Excellent Angelica,
ReplyDeleteYour comments are aptly drafted and to the point.
90/100
Recession is a decline in economic growth. It’s typically defined as a decline in real GDP (Gross Domestic Products is the value of all final goods and services produced in an economy in a given year) for two or more consecutive quarters, causing a contraction in the total volume of production in the economy.. These are the characteristics of recession:
ReplyDelete• Declining demand for output
• Heavy price discounting that leads to lower inflation
• Rising unemployment as firms try to minimize cost
• Increased government borrowing
• Fall in investment due to lower confidence
• Decrease in businesses profits
Some people argue that recessions may give some temporary benefits such as low prices of goods and services, lower share prices, and lower interest rate. However, the consequences and long term effect of recession on the world economy are severe if it’s not solved properly. These are the consequences of recessions:
- Low tax income received by the governments. Due to lower demand for goods and services and rising unemployment, people will have less money to spend and thus government will receive lower tax income to finance the economy.
- Further rise in unemployment. A drop in economic activity, leads to redundancies, and businesses closures, which all contribute to rising unemployment. With high unemployment, an economy is unable to maximize the utilization of resources. Even when the economy is recovering, it takes time for unemployment to fall.
- Rise in budget deficit. This means government is spending more than the earning of an economy. In order to finance the economy, government need to borrow money.
- Rapid rise in government borrowing. The recession caused a steep deterioration in government budget. When there is negative growth, the government receives less tax. The government also has to spend more on unemployment benefits.
- Rise in Debt to GDP ratios. A fall in GDP and rise in debt means this will rise rapidly.
- Higher interest rates on government bonds because of fears over default.
- Domino effect on other countries’ economy. It is the fact that globalisation has decentralised production all over the world. The world economy is interconnected due to international trade. Foreign purchasers stop buying the product because they are in recession, and it has a negative effect on production all over the world.
- Low confidence makes it difficult for an economy to increase its aggregate demand. In a recession there will be rising unemployment and therefore a fall in consumer confidence. This will cause a rise in the savings ratio. Even though if the government cut income taxes this would increase disposable income, but if confidence was low people would not be willing to spend any extra and the economy would remain in a recession.
- Recession could lead to depression in the world economy. An economic depression is a severe downturn that lasts several years. It will take several years for an economy to increase the economic growth after a great depression.
In order to get out from this recession, policy makers need to take decisive actions to be able to tackle the problems that could risks global economy. Some actions can be taken by the government, such as:
- Monetary Policy. Lower interest rate usually increase consumer spending and investment because it reduces cost of borrowing, reduces cost of mortgage payments, increases disposable income, and reduces incentive to save.
- Fiscal Policy. In theory Lower taxes and / or higher government spending should increase to aggregate demand and increase economic growth.
- Increase Money Supply
Global economy need to avoid further recession by taking decisive actions that can tackle the real problem that all economies are facing. The developed and developing economies have to work together in the present crisis. Banks also need to check the liquidity and credibility of borrowers before lending money in order to avoid default.
Good Evelyn,
ReplyDeleteYou have done a nice work.
Presentation of data and references will definitly improve the quality and reliability of your comments.
Marks: 88/100