Page 221 - DECO402_Macro Economics

Macroeconomic Theory

Notes that they increase their stocks. In this way expansion process will remain accumulative and self
supporter until economy does not reach that high level of production which is known as peak or
boom.
Prosperity or peak may take the economy to the level of full employment.; and may bring inflationary
increase in prices. It is a sign of end of prosperity phase and start of recession. Seeds of recession
are situated inside boom in form of tension in economic structure, which do the job of control on
expansive route. These are they:- (a) scarcity of labour and raw material etc because of which costs
increase relatively to prices (b) increase in interest rates because of scarcity of capital; and (c) when
income increase, because of the stable tendency of prices and consumption, inability of consumption
to increase. First factor decreases profit margins. A second factor makes investments expensive and
along with the first, decreases trade – expectations. Result of third factor is stocks get accumulated,
which expresses that sales and consumption are lagging behind production. These forces become
accumulative and self supportive. Industrialists, traders and businessmen become alert and over-
optimism is taken by pessimism. It is the start of upper turn.

Recession

When from peak, which is of short duration, movement happens downwards, recession starts. “It
targets that duration of the turn in which forces that bring contraction, finally win over the forces
of expansion. Its external signs are – liquidation in stock market, tension in banking process, some
liquidation of debts, and start of decline in prices." As a result, profit margins further decrease
because cost starts increasing ahead of prices. Some firms are closed. Other firms reduce production
and try to sell hoarded stock. Investment, employment and demand decline. This process becomes
accumulative.
Recession may be slow or fast. Sudden explosive condition may arise by fast recession, which is created
by banking process or stock exchange and panic and crisis spreads. “When crisis and more specifically
panics is spread, then it feels like accompanied by end of confidence and demands for liquidity. Thus
crisis may also arise because of some inquisitive and sudden failure in itself. Any firm or bank or
corporation declares that it is incapable of repaying its debt. Such declaration makes other firms and
banks weak at such time when because of lack of money in economic structure bad symptoms start
emerging; and then by it such wave of panic spreads that efforts to withdraw money from financial
institutions reaches the zenith .......... United States of America received such experience in 1873, 1893,
1907. In words of M. W. Lee, “When once recession starts then it starts spreading itself like jungle
fire, when once it starts moving then itself prepares its military troop and internally promotes its
destructive capacity.”

Depression

When extensive decline takes place in economic activities, recession merges in depression. Sufficient
reduction happens in consumption of goods and services, employment, income, demand and prices.
As a result of extensive decline in economic activity bank deposit falls, credit expansion stops because
traders do not agree to take loan. Bank rates decline a lot. As per Prof. Estey, “This decline of active
purchasing power is the basic background of decline in prices, which despite of general (extensive)
decline of production, targets depression.” In this manner, factors providing specificity to depression
are- collective unemployment, general decline in prices, profits, wages, interest rates, consumption,
expenditure, investments, banks deposits and loans; factories are closed; and all types of constructions-
capitalised goods and buildings – suddenly stop. These forces are accumulative and self supportive
and economy reaches the bottom.

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