Many times throughout world history, economic downturns called recessions or depressions have devastated both individual lives and countries’ economies. On a microscale, many people lose their jobs, businesses, and in extreme cases, their homes. On a macro level, unemployment rises, and gross domestic product (the way economists measure the success of an economy) sinks to new lows. Recessions and depressions are the cause of the ruination of many. Although these economic crises are seen as sudden and unpredictable, there are several signs that an economy exhibits when it is about to fall into such slumps. A recession and a depression are two fundamentally different economics crises. However, the two have similar signs. A recession is defined
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One type of government failure is an extreme amount of debt, which has the ability to lead to more internal issues. An example of an accumulation of debt that leads to recession or depression is that directly prior to the Great Depression, many countries, such as Britain, had large amounts of debt (The Telegraph Online). During times like these, none of the countries could repay their debts because any money that they had lent out was not able to be repaid to them because so many countries were in debt. This meant that no country’s economy was able to rebound, which just dragged the world economy down as a whole. One example of this is how when Brazil’s currency decreased in 1998, the country fell to economic ruin (Pires-O’Brien). They had no capital to pay back any country to whom they owed money to, and therefore, the majority of Latin America was stuck economically, because they could not pay any country back without collecting any debt. As a result, many foreign countries withdrew their investments from Latin America, cultivating an even deeper depression (Pires-O’Brien). The government intervening in the economy can be just as big of a sign as the government failing in the market system. One way the government can intervene is by raising the interest rates. When a government raising interest rates, that is a sign that they are trying to combat inflation, which is a known indicator for recessions and depressions. When interest rates are increased, people tend to borrow less, as borrowing capital becomes more expensive. Less borrowing means that there is less liquid capital in circulation. This leads to the value of the dollar increasing, because with less capital, each dollar has to be worth more, as the size of the economy has not changed. As the value of the dollar increases, the real value of the dollar becomes closer to the nominal value of the dollar, which means that
One type of government failure is an extreme amount of debt, which has the ability to lead to more internal issues. An example of an accumulation of debt that leads to recession or depression is that directly prior to the Great Depression, many countries, such as Britain, had large amounts of debt (The Telegraph Online). During times like these, none of the countries could repay their debts because any money that they had lent out was not able to be repaid to them because so many countries were in debt. This meant that no country’s economy was able to rebound, which just dragged the world economy down as a whole. One example of this is how when Brazil’s currency decreased in 1998, the country fell to economic ruin (Pires-O’Brien). They had no capital to pay back any country to whom they owed money to, and therefore, the majority of Latin America was stuck economically, because they could not pay any country back without collecting any debt. As a result, many foreign countries withdrew their investments from Latin America, cultivating an even deeper depression (Pires-O’Brien). The government intervening in the economy can be just as big of a sign as the government failing in the market system. One way the government can intervene is by raising the interest rates. When a government raising interest rates, that is a sign that they are trying to combat inflation, which is a known indicator for recessions and depressions. When interest rates are increased, people tend to borrow less, as borrowing capital becomes more expensive. Less borrowing means that there is less liquid capital in circulation. This leads to the value of the dollar increasing, because with less capital, each dollar has to be worth more, as the size of the economy has not changed. As the value of the dollar increases, the real value of the dollar becomes closer to the nominal value of the dollar, which means that