Recession is a slow down of business activity. In recession, employment and output both decline. There are many forces which bring the contraction phase of business fluctuations. First of all the prices of the commodities rise the wage of the workers tend to lag behind. The reduction in the purchasing powers of the workers brings down the demand for consumer goods. Due to the shortage of some inputs the expansion in production of goods is hampered.
The non-availability of credit beyond a particular limit of expansion acts as a serious brake on prosperity. The financial institutions begin to recover the loans. The firms which are unable to pay back the loans begin to liquidate their stocks. When more firms sell their output at the same time, the price level starts falling. If a few firms get involved in losses, a wave of pessimism runs through the share markets. The firms begin to curtail production. Workers are laid off. The outstanding orders for raw materials are cancelled. The wave of pessimism passes on to other sectors of the economy.
In the case of depression if the slow down in general economic activity continues over a longer period of time and is severe, it then enters into the depression phase of the business cycle.
The non-availability of credit beyond a particular limit of expansion acts as a serious brake on prosperity. The financial institutions begin to recover the loans. The firms which are unable to pay back the loans begin to liquidate their stocks. When more firms sell their output at the same time, the price level starts falling. If a few firms get involved in losses, a wave of pessimism runs through the share markets. The firms begin to curtail production. Workers are laid off. The outstanding orders for raw materials are cancelled. The wave of pessimism passes on to other sectors of the economy.
In the case of depression if the slow down in general economic activity continues over a longer period of time and is severe, it then enters into the depression phase of the business cycle.
