Sunday, November 22, 2009


Technically recession is confirmed if GDP (Gross Domestic Product) growth is negative for a period of two or more consecutive quarters. However, this definition of recession does not take into account several other important macroeconomic factors like national unemployment rates, consumer confidence, spending level etc. As a result there is no universally accepted definition of recession. The agency that is officially in charge of declaring a recession in the United States is known as the National Bureau of Economic Research, or NBER. The NBER defines a recession as a “significant decline in economic activity lasting more than a few months.”

Shapes of Recovery

Recession shapes are used by economists to describe different types of recessions. There is no specific academic theory or classification system for recession shapes; rather the terminology is used as informal shorthand to characterize recessions and their recoveries. The most commonly used terms are V-shaped, U-shaped, W-shaped, and L-shaped recessions. The shapes take their names from the approximate shape economic data make in graphs during recessions. The letters can also be applied referring to the recoveries for example V-shaped recovery.

V Shaped Recovery - In a V-shaped recovery, the economy suffers a sharp but brief period of economic decline with a clearly defined trough, followed by a strong recovery. A clear example of a V-shaped recession is the Recession of 1953 in the United States. In 1953 growth began to slow, in the third quarter, the economy shrank by 2.4 percent. In the fourth quarter the economy shrank by 6.2 percent, and in the first quarter of 1954 it shrank by 2 percent before returning to growth. By the fourth quarter of 1954, the economy was growing at an 8 percent pace, well above the trend.

U Shaped Recovery - In a U-shaped recovery GDP may shrink for several quarters, and only slowly return to trend growth. The Recession of 1973–75 can be considered a U-shaped recession. In early 1973 the economy began to contract and continued to decline for nearly two years. After hitting the bottom, the economy climbed back to recovery in only in 1975.

W Shaped Recovery ­- A W-shaped recovery or "double dip" recession occurs when the economy has a recession, emerges from the recession with a short period of growth, but quickly falls back into recession. The Early 1980s recession in the United States is cited as an example of a W-shaped recession.

L Shaped Recovery - An L-shaped recovery occurs when an economy has a severe recession and does not return to trend line growth for many years, if ever. The steep drop, followed by a flat line makes the shape of an L. This is the most severe of the different shapes of recession. A classic example of an L-shaped recession occurred in Japan following the bursting of the Japanese asset price bubble in 1990. From the end of World War II throughout the 1980s, Japan's economy was growing robustly. In the late 1980s a massive asset-price bubble developed in Japan. After the bubble burst the economy suffered from deflation, and experienced years of sluggish growth; never returning to the higher growth Japan experienced from 1950-1990.

Now it's upto You to decide what kind of recession we are going through!


Piyush said...

Great one!!!
This is so informative, never knew about all these shapes!!!

pushpak said...

good....really liked the way u gave examples to explain the shapes of recovery which made it easier to understand...would like u to write more of these types of blogs....

Monali Churi said...

Really very informative...
Good work..
Keep the spirit going..

ThinkPad said...

Thanks everyone!!

Harsha said...

Informative and well explained!

confusion said...

It was very informative and well described .. By the way were you rehearsing for a 18 marks question on Recession . :)

ThinkPad said...

Thanks Confusion!! I wasnt rehearsing..

Post a Comment