What is recession?

The current financially turbulent times have got many wondering about what is recession. Economic recession is typically the slowdown of the growth rate of one country or many countries at the same time.

Economic recession usually takes place when the consumer demand for products and services reduces. Hence as the sales of these products and services drop the businesses and companies stop expanding. Subsequently these companies and businesses either stop hiring new workers or start laying off existing employees. This causes a chain reaction. As the laying off begins and hiring freeze is brought into place the purchasing power of consumers further reduces and the effects are noticed as the real estate prices begin to fall.

Most experts opine that the current economic recession began with the US entering the recession period in 2007 as the real estate prices began to fall. But unlike most economic recessions the current recession began with a fall in house prices hence no one expected it to be an economic recession. Hence most people thought that it was simply the end of the real estate bubble.

Various economic textbooks define recession to be a period in which the GDP growth of the country falls and must remain in the negative for two subsequent quarters. But for practical purposes economists concur that an economic recession begins when a country starts experiencing slowing but positive GDP growth rates. In such cases the country experiences one negative growth quarter followed by many positive growth quarters and they are again followed by one negative growth quarter.

The current recession has seen this pattern with negative growth in the last two quarters of 2008 but positive growth in the first two quarters of 2009. But when the economy lost 20,000 jobs in early 2008 that is when everyone realized that recession had begun.

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What is Inflation?

The current financial turbulent times has seen most people wondering what inflation is. Inflation is in fact the increase in the prices of products and services and also the continuous increase in the prices of these products and services. Inflation usually occurs when the currency of the country has been devalued and hence the population of the country end up paying more for the products and services required.

Experts usually concur that when the inflation is mild the economy grows at a healthy rate. Since the population of the country buys products and services now to prevent excessive spending in the future due to price rises the current demand increases. This current demand helps the economy of the country grow. Hence any economy can sustain an inflation rate of at least 2 percent.

Causes of Inflation:

Inflation can occur due to a variety of reasons. However the main reason for the inflation is the demand and supply factor. In case there is more demand for products and services but the supply remains static the price increases thus causing inflation. Similarly inflation is also caused due to excessive money supply in the hands of the general public. When the money supply with the general public increases the demand for products and services increases, but since the supply remains the same the prices of the products and services shoot up causing inflation.

Types of Inflation:

There are also many types of inflation with asset inflation being the most commonly occurring inflation in many countries. US has seen asset inflation in the real estate sector while the Middle East oil rich countries experience asset inflation with respect to the prices of crude oil. Other types of inflation include hyperinflation experienced in Germany before World War II and stagflation which was experienced in USA in the early to mid 1970s.