UK Economy Emerges from Recession - Research Paper Example

Introduction America is currently passing through depression, not recession, as stock market prices are falling, the job market is floundering, and prices for goods and services are increasing consistently. This started to happen in the late 2007 when financial institutions started to fall due to the subprime mortgage crisis. Recessionary phase of business cycle often results into decline in growth, increase in unemployment as well as a general increase in the price levels besides resulting into crumbling of stock markets (Blanchard). The recession also results into sizeable decline in the consumer spending due to uncertainty prevailing in the market. What is critical however is the assumption that governments, in this type of situation, tend to adapt expansionary macroeconomic policies in order to stimulate growth and increase in employment level. Depression however, is an entirely different aspect of business cycle as it indicates more depressed levels of economic activity. (Krugman and Wells) The current economic situation is quite alarming due to the fact that despite the extensive support from the government, economy is not recovering. The discussion on the double dip recession is heating as many economists feel that US economy specifically may face the double dip recession if timely corrective measures are not taken. (Elliott). This situation is therefore turning out to be the same situation which America experienced during 1930s as same macroeconomic indicators were not showing satisfactory performance at that time also. This paper will therefore attempt to argue that currently America is going through a depression and not the recession as macroeconomic variables are showing same signs as they were during the depression of 1930s. Recession Vs Depression There are key differences between recession and depression as both indicate the degree of severity faced by the economy. Recession is often characterized by the decline in the gross domestic product (GDP) of the country by more than a quarter. This decline is often limited to less than 10% decline in GDP of the country. Recession is also characterized by the decline in the industrial production as well as the real income. Whereas depression is considered as an economic situation where the overall economy shrink by more than 10% over the period of one year in any given period. Thus the difference between the two is really dependent upon the length of time the economy experience a continuous decline in the key economic variables. Depression therefore indicates a more grave situation wherein economy activity really contract and governments have to undertake systematic assistance to the economy in order to revive the situation and stimulate the aggregate demand so that economy can recover and grow. (Blanchard) The question of whether America is passing through the depression or recession therefore needs to be discussed from the perspective of how the different economic variables behaved in the recent past. In order to establish as to whether it’s a plausible argument, a comparative analysis will provide a better idea as to whether the America is passing through the depression or not. Depression of 1930s and Current Depression Great Depression of 1930s is considered as one of the most critical phases of the economic history of United States. This was also the longest period during which economic activity continued to decline consistently for over a period of decade. This depression also started with the drop in the stock markets during 1929 as the Black Tuesday witnessed one of the biggest stock market crashes of America’s history. The decline in Stock market therefore triggered the downturn in economy. (Krugman and Wells) During this period, unemployment level reached to 25% , industrial production declined by more than 40% whereas prices started to decline more sharply indicating deflationary tendencies of economy during depression. It was also estimated that more than 13 million people became unemployed and families started to suffer heavily. Housing and construction sector suffered heavily along with the banking sector of the economy. (Homan) The purpose of above discussion therefore is to provide a comparative analysis of the issue as same macroeconomic variables are showing negative signs during the current economic crisis also. During 2008, real GDP of US declined by more than 35% followed by another decline of 45% during 2009. It is also striking to note that financial institutions are becoming the worst hit segments of the business. Stock markets plunged and so does the employment rates and wage rates. Large scale industries also registered decline in the production as organizations like General Motors and Ford Motors became badly affected and were forced to get the support from Government to bail them out. It is also critical to note that like great depression of 1930s, effects of this depression have trickled down to other countries also. Major economies such as UK have been affected in the same way as US and economic activity declined in the similar manner i.e. all major macroeconomic variables showed negative growth over a sustained period of time in UK also. (BBC) It is also important to note that so called official recession in America is not yet over as the recent efforts by FED to reinitiate the process of quantitative easing indicates that recovery is not yet been completed and things are becoming relatively more difficult for the economy to make a complete recovery. (Elliott and Inman) The response of American Government to tackle the issue of economic recovery however, is different this time as Government has focused on providing targeted support to different institutions besides announcing a general bailout package. Despite the differences in the response of government in achieving recovery, current economic phase of business cycle in US indicates that it is depression rather than recession. Conclusion It has been officially declared in US that the current economic situation is an economic recession and not the depression. However, a closer look at the data would suggest that macroeconomic indicators are depicting the picture of a situation which is like depression and not a recession. Since depression is characterized by sustained decline in the economic activity and current data also suggests the same. Real GDP is declining since 2007 by more than 10% along with increase in the level of unemployment and decline in the wage rates. Bibliography BBC. UK economy emerges from recession. 27 January 2010. 7 November 2010 . Blanchard, Olivier. Macroeconomics. New York: Pearson Prentice Hall, 2008. Elliott, Larry and Phillip Inman. US Federal Reserve launches new round of quantitative easing. 3 November 2010. 7 November 2010 . Elliott, Larry. US fears double-dip recession with rising job losses. 8 January 2010. 7 November 2010 . Homan, Timothy R. "Unemployment Rate in U.S. Falls to 9.7%; Factory Payrolls Grow." 06 Feb 2010. Business Week. 04 November 2010 . Krugman, Paul and Robin Wells. Macroeconomics. New York: Worth Publishers, 2009. Read More