Economic Downturn - Essay Example

Running head: Economic Downturn Insert His/her Economic downturn means the changing of economic conditions of one economy from good to bad. This change may be because of several separate or interrelated actions. Some of the key causes are given below. First of all, the interrelated markets of different countries may cause this downturn. That is, America has a strong market in Asia, and if American production collapses it will also cause cost-push inflation in Asia which will then cause problems in other countries related to Asia.

Another cause of this economic downturn is the borrowing and lending of money. For example, the banks of developed countries are keen to lend to developing countries. This makes both the lender and the borrower unstable as the lender is not left with any money for his use and the borrower gets deeper into the loan. Due to this system, financial intervention has changed into globalized finance. In addition to that, shortages of basic necessities especially food, have also caused many economies to ruin.

Recently these crises are increasing at a staggering rate. These shortages cause developed countries to be crushed under loans from developed ones. Fluctuations in the real estate markets also fuel the downturn of any economy. For example, the collapse of the Lehmann brothers caused a great downturn in the US economy. Housing, being one of the basic necessities of life, has a great impact on the lives of the people. Large financial institutions invest in housing as it is a productive sector. People also borrow money to buy houses and expect the prices to rise so that they can get a profit.

The variations in the exchange rates also trigger the economic recession. An appreciation in a country's exchange rate can cause problems for other countries as well. Especially if the country is developed and its exchange rate appreciates and the country which imports from it is developing, with imports being inelastic, the developing country will face a tough crisis. The exchange rate crisis also triggers many macroeconomic issues, inflation, and balance of payments problems, which then cause a recession in the economy.

Economic crises in separate economies eventually lead to global economic crisis which is far more serious than the ones in individual economies.