Impact of the Recession on US Economy

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Table of Contents

Introduction
Effect of recession on the demand and supply of goods
Effect of recession on income and wealth distribution
Effect of recession on the mortgage and bank interest rate
Effect of recession on the U.S businesses
Effect of recession on the youth
Conclusion
Reference List

Introduction

Recession is the tendency of the economic activities of a given economy to suddenly decline. Currently, there are various macroeconomic activities that are affected by the cycle, for example the employment of citizens, GDP, investing power of investors, spending capabilities and on the running practices of business. In the recent times the U.S economy has been hit by recession. This has resulted in a slowdown of the economic activities around the country that has resulted on a negative impact on the local economies.

Effect of recession on the demand and supply of goods

During recession the spending power of the people had become less. The decline in the spending power is usually due to increased cost of living caused by inadequate income or unemployment due to lack of jobs or being laid off from work hence, the Purchasing power of the people decreases. During this economic period, the price of essential goods drastically escalated. However, the demand of necessity goods was not affected by the elasticity curve since demand for such commodities remained constant.

However, due to recession the price of luxury or conspicuous commodities increased drastically though there was no significant increase in demand. However, in instances where the commodity was not a necessity in the market, the increase in price brought by recession factors did affect the elasticity curve since the consumers shy away from spending during the period as the economic conditions did not provide for such spending habits. (Wilson, 2007).

Effect of recession on income and wealth distribution

In addition, recession results in a decreased Gross Domestic Product. This in turn affects the income and wealth distribution of the people. This occurs since people will normally shy away from investing in economic opportunities since they are not in a position to have large capital outlays or even get financial help from financial institutions which are usually severely affected by the recession.

In addition due to a decreased income per-capita, the people often spend less and the majority of investments or business ventures wind up business until the economic situation improves.

There is also a relationship between income generated during this period, its distribution and the macroeconomics of a given region by the various investments made by people. Therefore it shows that the income and wealth that people have is directly related to the macroeconomics factors and economical growth. Due to recession the economic growth us often stagnant hence the distribution of wealth is also decreased.

The regions or states have a higher rate of recession wealth or income factors, which are determined by historical factors that tended to, dictate how wealth will be distributed in the region. This has tended to be so because each region tends to follow certain growth patterns that have been determined by the economic opportunities available in the region. Hence each and every country has different economic growths patterns as well as income and wealth distribution patterns.

In addition, empirical data will show the relationship between income and wealth of a country to the income per- capita. Hence, in regions that have more investment opportunities, the income per-capita tends to be higher and its wealth is equally distributed in the region. However, in developing or poorer countries the opposite is the case.

Since the economic opportunities are less, the income per- capita is low and only a few individuals have access to the few economic opportunities and thus the income and wealth distribution is not equally distributed .Therefore, if the price of a commodity increases while the income of the per-capita income of the people remains the same, the demand of the commodity will decrease and so will the supply hence a change in the elasticity curve( Zeira, 2005).

Velocity of money Graph

Effect of recession on the mortgage and bank interest rate

Rent is the price paid by a person who uses property belonging to another person. Due to the recession effect, the mortgage costs were very expensive for people to afford therefore majority of the citizens who had inadequate income to facilitate the repayment of the mortgage installments defaulted.

As a result the demand of real estate declined drastically across the region as prospective homeowners could no longer afford vast capital outlays to purchase homes or even be given a mortgage by financial institutions. As a result of the decline in demand for housing, the rent of houses also declined though there was no immediate demand for housing units from the people (Carrington, 2005).

Interest is the cost paid for using money. It is usually stated as a percentage of the money borrowed. Money which by its nature is not an economical resource can be used in the acquiring of goods and services.

Therefore, one can be able to borrow money and in turn pay an additional amount to the principle owned. The amount of interest paid is usually calculated by putting into consideration the various factors affecting the economical conditions of a place. In the U.S the bank lending rates increased significantly as an effect brought about by the recession.

Due to the high rate of defaulting by debtors in repaying their debts, the banks had to increase their lending rates in order to recover the money lost in defaulting loans. Furthermore, the prevailing financial institutions, and banks had to increase their lending rates in order to factor in the high lending risks in the market. Also by increasing the lending rates interest, only the desired cliental could apply for loans as those who were not in a financial opposition could not do so (Oswald, A. & Sanfey, 2009).

Effect of recession on the U.S businesses

When the recession cycle hit the U.S., the first impact was felt by businesses both small scale and large scale businesses. Due to it, the production costs increased significantly over a short period. The cost of production of a product determines the price of the product, which id determined by the accumulative cost of all the resources involved.

The economical conditions brought by the recession dictated the cost of production of producing the commodity. The cost of raw materials became very expensive while their commodities suddenly lost demand due to the weak purchasing capability of the consumers.

Also the market price set price set by the demand determined whether the seller would commence on the production of a certain product, therefore the sellers found that the market price was very low than the anticipated set market price, hence, did not produce the products as a result they reduced their production or had to halt the production operations.

As a result a lot of drastic measures had to be put in place in order to survive the hard economic times. Some of the measures included; laying of workers, or closing off some business subsidiaries. However some of the businesses could not make it through the recession hence they winded up.

The U.S government had to in intervene in order to rescue some vital businesses by offering financial assistance in form of stimulus packages. In addition the employment rate has drastically grown and has hit the highest point in the last 30 years of the U.S unemployment history. The U.S stock market was also severely affected by the recession as the value of the stocks suddenly dropped since the investors expected the value of stocks to escalate further and thus they started disposing off their securities.

Due to the panic caused by the slump of the stock market, investors were off loading their shares in the market at deep prices since there was no demand from other stock investors to purchase them. As a result the sellers sold them at a very low price all at once that resulted in an overall decline in the value of shares. Due to decline in value of the shares, the value of firms declined as well as the profits (Oswald, A. & Sanfey, 2009).

Effect of recession on the youth

Majority of the youth after their completion of education, expected to get employed in various institutions. However due to a decline in the economic growth in the U.S, majority of them were not employed and according to statistics this trend of unemployment could continue for quit sometime into future due to the fact that business will take some time to recover from the effect or recession (Oswald, A. & Sanfey, 2009).

Conclusion

The recent recession has resulted in a number of negative effects on both economic and social institutions of the U.S. the number of unemployment has increased significantly thereby resulting in increased levels of poverty. In addition businesses have either lost their sources of revenue or completely winded up. The recession effects has also had negative impacts socially and economically on the youth whole have greatly suffered from unemployment and in turning relying on other unethical means to gain money like stealing.

The U.S government has also assisted in the trying to save the negative effects of the recession by offering financial assistance through stimulus packages. By doing so the government has saved a lot of companies from winding up. In addition it has saved the employment of many workers from being terminated suddenly. Stimulus packages also assist in jump starting the economy instead of waiting for the whole economic cycle to place at its own pace.

Reference List

Carrington , H.W. (2005). Perfect competition and the transformation of economics: south economic journal.125-231.

Khan, M. (2006). The supply and demand for exports: A Simultaneous Approach, 124-178.

Oswald, A. & Sanfey, P. (2009). Profits, and Rent-Sharing, The MIT ecomonic review, Vol. 12 22-27.

Wilson, R. (2007). A Bidding Model of Perfect Competition: The Review of Economic Studies, Vol. 10, 452-501.

Zeira, J. (2005). Income, distribution and macroeconomics: The Review of Economic Studies Ltd, Vol. 5, 45-65.

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