Juan:'So, what's your opinion about the economy at the moment?'
Peter:'More positive than I was a couple of years ago when the economy was in recession and people were losing their jobs and businesses were closing down.'
Juan:'I know that a recession is bad, but what actually does it mean?'
Peter:'A recession is when the size of an economy decreases in two consecutive quarters of the year. For example, January to March and April to June.'
Juan:'But how do they know if an economy is either decreasing or increasing in size?'
Peter:'To see how well an economy is doing, economists look at the total value of products and services that are bought in the economy of a country during a specific period of time (e.g. a quarter or a full year). This value is called GDP (Gross Domestic Product). By comparing the amounts of GDP over a period of time, they know how well the economy is doing.'
Juan:'So, what's the difference between a recession and a depression then?'
Peter:'A depression is a very bad recession. When a recession continues for two or more years, it is called a depression. Like what happened in the 1930's.'
Juan:'What caused the economic depression in the 1930's?'
Peter:'Many factors. But the main one was the stock market bubble.'
Juan:'I don't understand what a bubble means.'
Peter:'A bubble is when the value of a particular type of product increases dramatically.'
Juan:'But isn't that a good thing for the economy?'
Peter:'Not really. The price of a product or service mainly depends on two things. Firstly, on the amount of demand there is for it, how many people want to buy or use it. And secondly, on the amount of supply of it, how much there is available to be bought or used. When there is more demand than supply, the price/value of a product or service increases.
Normally, as the price of a product or service increases this encourages other companies to start selling the product or service. This increases the supply and as a consequence the price of the product falls. But with a bubble, this doesn't happen.'
Peter:'Normally, because there is a limited supply of the product (like land or stocks and shares in companies) or it takes a long time for new supplies to be produced (like housing or buildings). As result, the product can become very overvalued as demand continues to grow and supply doesn't.
When the product becomes too overvalued, people stop buying it.'
Juan:'So the price falls?'
Peter:'Yes. But normally with bubbles people start to panic and the price falls dramatically, causing people to lose lots of money. Often this can affect the whole economy and cause an economic downturn, where the rate of growth in GDP falls or the size of the economy decreases. If the economic downturn lasts and and the size of the economy is contracting/decreasing in size, it can become a recession.'
Juan:'So what's the opposite of an economic downturn?'
Peter:'When the size of the economy is growing (GDP is increasing), the economy is in a period of economic expansion. If the level/rate of this expansion/growth is very high and lasts for a long time, it is normally called a boom (also called an economic boom). A boom is like the opposite of a recession.'
Juan:'I've heard people call economic expansion after a recession a different name, but I can't remember what.'
Peter:'After a recession has ended and the economy is growing again, it is often called a period of economic recovery.'
Juan:'So it seems that most countries have a period of boom followed by a recession, then followed by another boom?'
Peter:'Generally that happens. But sometimes countries have a very low rate of economic growth/expansion (less than 2% a year) so they never have a boom. If an economy has this, it is called stagnation.'
Juan:'But stagnation sounds like a good thing. At least the economy is growing?'
Peter:'Not really. A healthy economy should be expanding at more than 2% per year. Economic stagnation shows that something is wrong with the economy. For some reason, companies are not performing very well and not employing more people.'