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Difference between Recession and Expansion
The level of economic activity as a whole will always fluctuate, resulting in what is called business cycles. It's defined as the ebb and flow of economic activity relative to a steadily rising long-term average. A country's trade, sales, employment, industrial output, and income can all be affected by these non-recurrent sequences of events. There is no set order for the four stages that make up the business cycle (contraction, expansion, peak, and trough).
What is Recession?
A severe decline in economic activity that persists for more than two quarters indicates this. It starts when the economy is doing poorly and ends when it has recovered from its low point.
It is distinguished by a decrease in −
International commerce
Industrial output
Spending is determined by household income
Stock market valuations
Investments
Employment
Although the reasons for recessions are diverse and frequently intertwined, some of them are as follows −
High rates of interest
Inflationary pressures are high.
Customer skepticism about the market
Bubbles in assets
Overproduction
The duration, depth, and breadth of a recession all contribute to its overall intensity. The decline in broad measures of income, output, employment, and sales determine the recession's depth, while the recession's length is dictated by the time it takes to recover from the low point. Its degree of diffusion is measured by how widely it has spread across regions, sectors, and economic activities.
What is Expansion?
When GDP increases for three or more consecutive quarters in a row, we are in an expansionary business cycle phase. The business cycle moves from its trough to its peak due to an expansion. Indicators include applications for unemployment benefits, factory weekly labor hours, building licenses, and orders for consumer items. However, interest rates and capital expenditures are the surest signs of growth.
An expansion is distinguished by;
Increase in consumer spending
a boost in employment
a rise in equity markets
A rise in consumer trust in the economy
Investments will be increased
Per capita income growth
Some of the variables that might lead to an expansion are as follows −
Fiscal policies
Budgetary policies
Rates of interest
Policies governing regulation
Credit availability
The average duration of an expansion is four years, but this time frame is by no means set in stone and can be anywhere from one year to ten years or more.
Differences − Recession and Expansion
The following table highlights how Recession is different from Expansion −
| Characteristics | Recession | Expansion |
|---|---|---|
Definition |
When economic activity in a country drops significantly and stays low for more than two consecutive quarters, the economy is considered to be in a recession. |
When GDP continues to increase for more than two consecutive quarters, we are in an expansionary business cycle phase. |
Period |
A recession is the period after a peak when activity decreases significantly. |
An expanding period begins at a low point and ends at a high point. |
Measure |
The length, depth, and breadth of an economic downturn are all indicators of its severity. It is the fall in aggregate income, production, employment, and sales that determines the severity of a recession; the time elapsed between the recession's trough and its peak; and the recession's geographical and sectoral breadth that establishes its duration and degree of diffusion. |
Two measures of economic growth are interest rates and investment. |
Effects |
A recession causes a decrease in global trade, industrial output, household income and spending (which is directly related to income), stock market values, investments, and employment. |
A rise in consumer spending, a rise in employment, a rise in stock markets, an increase in consumer confidence, a rise in economic investments, and a rise in per capita income are all direct effects of an expansion. |
Causes |
Overproduction, asset bubbles, excessive interest rates, inflation that exceeds the rate of inflation, a drop in consumer confidence, and a loss of faith in the economy are all potential causes of a recession. |
Many variables contribute to growth, including government actions in the areas of monetary policy, fiscal policy, interest rates, regulatory policy, and access to credit. |
Conclusion
When economic activity in a country drops significantly and stays low for more than two consecutive quarters, the economy is considered to be in a recession. Foreign trade, industrial output, household income (and, consequently, expenditure), stock market values, investments, and employment all decline between the peak and the trough.
On the other hand, a period of economic expansion is one in which GDP increases for two or more consecutive quarters. As GDP rises, the economy is doing well. When the economy is booming, indicators such as consumer spending, employment, equity markets, consumer confidence, investments, and per capita income go up between the trough and the peak.
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