Objective of the paper: The paper seeks to establish what impact have been seen in the different countries, both developed as well as developing, of the global recession and economic turmoil which has been in place for over two years now. In general, the paper seeks to analyze the situation from the point of view of producers, consumers, employment, debt and the steps that the countries have been taking to pump money back into the economy and bring it out of recession. Since each economy is different from the others, it would be interesting to see different measures that have been taken all over the world. The paper focuses on the global recession which was seen in the years 2008 and 2009 and the impact thereof.
Motivation for the project: Being a student of economic, policy making and decision making are two aspects of an economy which are very fascinating and which also influence the operations and functioning of an entire country. It would be enlightening to study these in effect, in response to the situation which has now become a global problem.
- Unemployment in the economy/Employment and wages
- Problems and current situation of producers
- Problems faced by consumers in the market/Economic spending and domestic expenditures
- Debt in the economy and cash cycle/Foreign trade and balance of payments
Sources of Data/Literature review: The data which has been collected for the purpose of this assignment is largely secondary data which has been collected from government websites and portals. For the purpose of reference, scholarly articles and research papers which have been published in online journals and economics magazines have also been considered.
- “Impact of global recession on developed countries and BRIC countries” by Dr Justin Paul and Ryoko Ichinoise, 2010
- “The impact of global financial turmoil and recession on Mediterranean countries’ economies” by Michael Sturm and Nicholas Sauter, 2010
- “Global recession fears as stock markets tumble to nine month low”, Alistair Osborne, The elegraph UK, December 2013
- The World Bank data, http://data.worldbank.org/indicator/SL.UEM.TOTL.ZS
- OECD Data Bank, http://www.oecd.org/corporate/mne/statistics.htm
Forecasting method adopted: At the end of this paper an endeavor would be made to forecast the economic conditions in the next two years which will be seen based on the current situation and past performances. The method of forecasting used would be based on data predictions and by making use of trend graphs.
Impact of recession on developed economies and developing economies/Essay
In economics, when one studies the different phases which an economy goes through, one is bound to come across the phase of recession. It is, generally, seen as a business contraction cycle where there is slowdown of economic activities. All the economic indicators show a negative growth or a decline while there is rampant unemployment and inflation. This is the scenario that the world has been facing on a global level for the past two years. Economists are of the view that the coming years are not going to any brighter as more people will lose their jobs and all commodities are set to become dearer.
Countries and economies all over the world have been impacted because of recession. There has been a marked drop in production, there has been a considerable decrease in spending by consumers, many people have been laid off from their work and companies have refused to increase wages and salaries as their operating costs have gone up because of the inflation. Other impacts that have been seen across the world are a decline in exports, tourism revenues, foreign direct investments (FDI) and also a decline in oil revenues.
Although it is true that all countries, whether they come in the category of developed countries or developing countries, have been impacted severely by the recession the magnitude of impact has been slightly different in both the cases. The global recession of 2008 which was follow-on of the subprime crisis and the collapse of the Lehman Brothers gave economists some very interesting points to consider in regard to the decline in an economy. One of the most severe impacts was seen on the financial markets and financial institutions of the world as they lost more money than any other individual or company. Banks lost a lot of their capital because of the subprime mortgage crisis.
The ripple effect of the subprime mortgage crisis was seen all over the world and that is why the financial year 2008-09 is known as the year of extreme recession in economic history. The impact on developed countries was seen in the fact that there was a sudden rise in the unemployment rate. In fact one can say that during that period, the rate of delinquency for mortgage loans and the unemployment rate showed a proportional trend. The efforts of the Federal Reserve Bank in the United States to infuse cash into the economy by means of emergency loans and subsidies did not match the expected results as a result of which the stock market faced a slump and the value of the dollar depreciated. In other developed countries the banks tried the strategy of reducing interest rates on loans.
On the other hand, in the developing countries the impact was more of a secondary nature than primary. The fluctuations in the economy and the volatility that developing economies saw was a result of the financial crunch that investors and buyers were seeing in the developed countries. Developing countries are mainly dependent on exports as their source of revenue and foreign direct investment as their source of capital. When investors in the developed countries were faced by the financial crisis their first response was the withdraw their money from developing markets which led to stock market crashes in developing countries like India, Russia and Brazil among many others. It might be said that these impacts on the developing economies were more from a transmission channel which resulted in weakening of the Gross Domestic Product. But it must be noted that the impact on the developing countries has not been so drastic mainly because the impact on the banking sector and financial markets has been limited.
When one considers the response that developed and developing economies have seen towards macroeconomic indicators, the following pattern emerges. There has been a significant decline in both cases in the rate of employment. More people have lost their jobs and have been laid off in all the sectors whether it is manufacturing, banking, and insurance or even information technology. In case of companies that have hired people, the rate of hiring has also seen a rapid decline as compared to the last decade of hiring. For people who have managed to secure their jobs in this economy, there have no increments or salary hikes as companies are struggling to meet their expenses.
Producers have seen an increase in their operational cost as raw material, energy, power, packaging and all miscellaneous things have seen an increase in cost. Producing commodities or providing services has become expensive which has forced producers to take measures to save by whatever means they can. Eventually the producers have been forced to pass on the cost to the consumers and the buyers in the form of higher product prices. This has made commodities costlier and dearer.
Economic spending in the market has seen a decline in both the scenarios of a developed market as well as a developing market as the purchasing power of the consumers has gone down. This has resulted in lower cash availability in the market. Since exports have gone down in developing countries and so has tourism by a large extent, there is a decline in the earning capacity of the countries and their ability to earn foreign exchange. Balance of payments has suffered since it has become more expensive for developing countries to import goods from outside. Foreign trade has become strained since most countries cannot afford to source goods from outside. The value of currencies also declined as compared to the dollar.
In light of these details and the evidence that is produced by studying government records, it can only be forecasted that the current recession will take almost two to five years to subside and for the global economy to resume operations normally. Although many economies and countries are seeing positive growth, with substantial increases in foreign direct investment and an increase in consumer spending, unemployment still remains a very big concern. As per the data shared by the World Bank, in most of the countries, the trend charts predict an extended phase of high unemployment with no to very marginal increase in wages and salaries.
Even FDI for the entire world is a cause of concern because if the current trend continues then there will be a further fall in the amount invested by individuals and companies in developing countries which will mean that the stock markets will see more withdrawals. It can also be forecasted that only a part of the population has actually seen growth over the last years or since the recession has set in. More and more people are now coming in the category of poor or middle class as income has not increase in proportion to the spending. Till the time the economies are able to control inflation, there will be volatility in the market and consumers would find that even goods of basic necessity get expensive which will in turn cause a misbalance in the economy.
Performing the ANOVA test
In comparing the GDP performance of two countries – United States and Turkey, the ANOVA test was applied. The motive behind conducting this test was to first, analyze the variation of performance of both countries as compared to their past data and second, in comparison to themselves.
The GDP data from 2005 to 2012 for the United States, as a representative of developed countries was taken and for Turkey, as a representative for developing countries was taken. The data was as follows:
On this data the ANOVA single factor test was applied. In general, the formula for ANOVA testing is used to test a null hypothesis. The hypothesis which was tested for the purpose of this paper was that recession has had a varied impact on developing and developed countries.
The results of the ANOVA test conducted on the data mentioned above were as follows:
