IGCSE Economics 0455 – Government and the Macro‑economy: Economic Growth – Definition of Recession
Government and the Macro‑economy – Economic Growth
Objective: Definition of Recession
A recession is a period of sustained decline in a country’s real gross domestic product (GDP) and other key economic indicators. It is typically identified when the economy experiences two or more consecutive quarters of negative growth in real GDP.
Key Characteristics of a Recession
Negative growth in real GDP for at least two successive quarters.
Rising unemployment as firms cut production and lay off workers.
Reduced consumer and business confidence, leading to lower spending and investment.
Decline in industrial output, retail sales, and export volumes.
Pressure on government finances due to falling tax revenues and higher welfare spending.
How a Recession Is Measured
Statistical agencies use several indicators to confirm a recession. The most common is the change in real GDP, but other data are examined to provide a fuller picture.
Indicator
Typical Behaviour During a Recession
Real GDP
Negative growth for ≥ 2 quarters
Unemployment Rate
Rises sharply
Consumer Price Index (CPI)
Often falls or rises very slowly (deflationary pressure)
Industrial Production
Declines
Retail Sales
Fall
Business Investment
Contracts
Difference Between a Recession and a Depression
While both terms describe periods of economic decline, they differ in severity and duration.
Recession: Mild to moderate decline, usually lasting months to a few years.
Depression: A severe, prolonged downturn lasting several years, with a much larger fall in output and employment.
Typical Government Responses
Expansionary fiscal policy – increasing government spending or cutting taxes to boost aggregate demand.
Expansionary monetary policy – lowering interest rates or using quantitative easing to encourage borrowing and investment.
Targeted support programmes – unemployment benefits, job‑creation schemes, or subsidies for key industries.
Suggested Diagram
Suggested diagram: AD–AS model showing a left‑ward shift of Aggregate Demand (AD) leading to lower real GDP and higher unemployment, illustrating a recession.
Key Formulae (LaTeX notation)
Real GDP growth rate: \$g = \frac{(Yt - Y{t-1})}{Y{t-1}} \times 100\%\$ where \$Yt\$ is real GDP in the current quarter and \$Y_{t-1}\$ is real GDP in the previous quarter.
Unemployment rate: \$U = \frac{\text{Number of unemployed}}{\text{Labour force}} \times 100\%\$