A recession is a decrease of less than 10% in a country’s Gross Domestic Product (GDP). The decrease must last for more than one consecutive quarter of a year. The GDP is defined as the sum of private spending and government spending on goods, services, labor and investment.
The terms recession and depression are often confused. It can be said that a recession is in general not as severe as a depression. A recession tends to resolve more quickly.
Not everyone agrees on a specific definition for determining an economic recession, but most can point to several factors, which can cause a recession. Either significant drop in prices, or significant increases in prices can occur. A drop indicates that people may spend less money, thus the GDP is decreased. An increase in price may also reduce both private and public spending and thus decrease the GDP.
In some ways, it is quite natural for countries to experience mild recessions. This is a built-in or endogenous factor of a society. Spending and consumption are going to increase and decrease, as will prices. However, another factor besides these occasional built-in drops in spending is needed to evoke a recession. Usually, something changes quickly and provokes sharp increase or decrease in prices.
A recent recession in early 2000 was caused by the sudden decrease in activity of the dot.com industry. In the 1990s, the telecom industry had made huge amounts of money and began to overreach its expectations in terms of assessing future demand. Suddenly, the previously looked for demand was much lower than expected, leading to mass layoffs, decrease in production, and thus decrease in spending.
The dot.com fall is considered a “shock” in the GDP, which can fall sharply if the product or industry falls in production and spending. Though the recession resulting from the dot.com bust was considered over by 2003, it has far-reaching consequences that are still felt.
Those who initially made excessive amounts of money may still find themselves jobless. Telecom companies significantly cut jobs, and employment rates in the industry have never fully been restored. Telecom companies also cut costs by outsourcing production to foreign countries. While this outsourcing has allowed some companies to continue operations, it left many with training for specific jobs they could no longer perform.
However, other industries have since expanded and raised the GDP. So the recession is termed over even though many still feel its effects on a personal level. Terming a recession as “over” does not necessarily account for positive economic changes for the individual.
For example, sometimes recession is evaluated in terms of the country’s jobless rate. When this is the case, and people find jobs, failure to evaluate changes in income can make the economy appear more productive than it actually is. A former telecom employee who now works at Wal-Mart may have a job, but this job is not equivalent to former work in compensation. So analysis of only one aspect of a recession should not be used to indicate economic recovery.