The economy grows and shrinks, and we call this the boom and bust cycle. When the economy is growing, we call it a boom. When the economy shrinks, we call it a bust. When a bust lasts at least six months, we call it a recession. Recessions usually don’t last very long, but when they do last for a long time, they’re call depressions.
Even though the bad effects of even a short bust, recessions do bring some good things too.
Pros and Cons
During a recession, companies that aren’t doing very well end up closing. This is bad for them, but it could be good for other companies. When businesses close or get smaller, people lose jobs and have a hard time finding new ones. This is bad. On the other hand, sometimes when people can’t find jobs, they make their own. When people start their own businesses, we call them entrepreneurs. Recessions usually cause a lot of people to start their own businesses, which is good for them – often it’s even better for them than if they still had their old jobs working for someone else.
Inflation is when there is more money available but at a lower value. Price inflation is when things start to cost more. During recessions, both go down. This makes it easier for people who do keep their jobs and for entrepreneurs to start their own businesses.
The biggest problem with recessions though is that a lot of people lose their jobs and don’t find new ones or start their own businesses. A big problem for the government is that when people make less money, they pay less in taxes. Taxes are how the government pays for everything, so when it takes in less tax money, it can’t pay to keep the government running.
Recessions happen from time to time. You might hear that they have to happen, and that the market is due for a recession. But it doesn’t work that way. The economy doesn’t just decide it’s ready for a recession. A lot of things make recessions happen, and most of them can be avoided. Recessions happen, but they don’t always have to.