Problems of Recession

Readers Question: Identify and explain economic variables that may be affected negatively by the economic slowdown.

Some of the Problems of a recession

• Falling Output. Less will be produced leading to lower Real GDP and Lower average incomes. Wages tend to rise much more slowly or not at all.
• Unemployment. The biggest problem of a recession is a rise in cyclical unemployment. Because firms produce less, they demand less workers leading to a rise in unemployment
• Bigger government deficit. In a recession, government finances tend to deteriorate. People pay less taxes because of higher unemployment and they need to spend more on unemployment benefits.
• Devalutaion in exchange rate.  Exchange rates tend to devalue in a recession because people expect lower interest rates and so there is less demand for the currency.
• Hysteresis. Unemployment and lower growth tend s to create future problems and they are hard to solve
• Falling asset prices. e.g. lower house prices are occuring in US. This is particularly a problem because the main cause of current downturn is problems in the housing market and mortgage market
• Falling share prices. Lower profits lead to lower levels of share prices.
• Falling consumer confidence
• Social problems related to rising unemployment

• Problems in preventing a recession
  
• What Happens in a recession

Improvement in Current account deficit.