A recession is a period of falling real GDP, caused by lower demand or fewer or worse resources.
A recession is a period when real GDP falls. A common definition is two quarters in a row of falling real GDP.
A fall in total demand is the most common cause. Households may lose confidence and cut spending, firms may cut investment, or foreign demand for exports may fall. A recession can also come from a fall in the quantity or quality of resources, for example after a natural disaster or a pandemic.
Consequences. Consumers: incomes fall and confidence drops. Workers: unemployment rises, and those in work may face pay cuts. Firms: sales and profits fall, some close.
The government collects less tax, especially from income and company tax, but must spend more on benefits. Its budget moves towards deficit.
- Recession
- Fall in real GDP, often two consecutive quarters.
- Causes
- Lower total demand, or fewer/worse resources.
- Consequences
- Lower incomes, higher unemployment, lower profits, budget deficit.
Worked example: A recession caused by falling exports
Suppose demand for a country's electronics falls sharply because its trading partners are in recession.
- Exports fall, so electronics firms cut output and lay off workers.
- Those workers spend less, so shops and restaurants lose sales too.
- Real GDP falls for two quarters in a row: a recession.
- Government: tax revenue falls while spending on support schemes rises.
Watch out for this
A recession means prices are falling.
A recession is a fall in real output. Prices may still rise, but usually more slowly, because demand is weak.
Check your understanding
Which is a likely consequence of a recession for the government?
- Tax revenue falls while spending on benefits rises.
- Tax revenue rises because people save more.
- The budget surplus grows.