About Economic Downturn

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By Kent Ninomiya
eHow Contributing Writer

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An economic downturn is a reduction of economic activity that results in a decrease in a country's Gross Domestic Product. The GDP is the total market value of all the products produced by a country. The term, "economic downturn," is often considered synonymous with the term "recession." However, the definition of recession dictates that the reduction in GDP mus last at least two quarters. An economic downturn does not have a specific time frame.

Size

Economic downturn refers to varying degrees of slowing economic activity. It is an all encompassing term regardless of the size of the economic slowing. However, it is usually the first term used to describe a decrease in economic expansion. When the economic downturn goes on for at least six months, it is labeled a recession. If the economic downturn results in a 10 percent fall in GDP, it becomes an economic depression. If the economic downturn goes on long enough for the currency to be devalued and commerce to cease, it is called an economic collapse.

Identification

An economic downturn begins when businesses sell fewer things and provide fewer services. This happens because demand for their products and services falls. Falling demand can be a result of rising prices from inflation, reduced cash flow from deflation or lack of growth from stagflation. When any of these things happen profits fall, shareholders lose money and employees are laid off.

Effects

An economic downturn can feed on itself and create a domino effect that can lead to an even deeper downturn. Laid off employees raise the unemployment rate. This leads to lower personal income and less money available to spend on consumer items. When fewer dollars are being spent, there is decreased demand for goods and services. This results in a drop in production which, in turn, can lead to more layoffs. While all this is going on, the stock market is declining leading to a worsening economic downturn.

Potential

For an economy to pull out of an economic downturn, there must be some type of economic stimulus. This can be increased production for a war, a development of new industry, or a loosening of the currency markets making it easier to borrow money. Governments and financial regulators often attempt to prompt economies into recovery by cutting taxes, decreasing interest rates, increasing deficit spending and initiating public works projects.

Time Frame

Economic downturns can have widely differing time frames. Some last just a short time while others go on for a generation. The National Bureau of Economic Research says the United States has endured 18 extended economic downturns. The shortest lasted one year while the longest went on for 23 years. All of these economic downturns followed an economic crisis like banking failures, oil price increases or hyperinflation. All of these economic downturns ended when there was a stimulus to the economy like increased government spending, new technology or mobilization for war.