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Causes And Effects Of The Recession Economics Essay

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Published: Mon, 5 Dec 2016

A decline in two consecutive quarters or more of Gross Domestic Product is commonly considered as “Recession” in economic terms (Recession, 2010). “Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country in a given period of time”(Gans, 2008, p. 543). In general, GDP is the indicator of an economy’s position. “Global Recession” can be considered as period which reflected a decline in the world economy. According to many economists around the globe, most of the countries including New Zealand have entered recession since late 2008. In the following part of the writing, a wider aspect of the effects of recession on the Air New Zealand Limited, which is a New Zealand company and on society will be reflected. The effects on the Air New Zealand Limited will be mostly discussed from an economist’s point of view. Air New Zealand Limited is a company listed on the New Zealand Stock Exchange and New Zealand’s national carrier. It can be considered as a significant contributor towards New Zealand’s economy.

The first effect that Air New Zealand Limited faced during global financial crisis was taking a profit hit in the year 2009. The balance sheet reflected a fall of 19% in the profit and a fall of 90% in the bottom line profits to 21 million, compared to the year 2008 (TVNZ, 2009). It was also noticed by the senior officials of Air New Zealand that the number of passengers flying were also decreased significantly, which reduced revenue of the company. The main reason for it was the reduction in income of the average household. In the period of recession, most of the companies are less productive than they would be during economic wellbeing, which eventually results in less work available and further decreasing income of workers. The number of passengers flying with Air New Zealand reduced as a result of change in the income elasticity if demand. “Economists use the income elasticity of demand to measure how the quantity demanded changes as consumer income changes”(Gans, 2008, p. 95). Goods and serviced that are luxuries have elastic demand as they could be substituted by some other goods but necessities have inelastic demand as they are basic requirements and cannot be substituted. In the above issue related to Air New Zealand, the passengers who travel for leisure reduced significantly as they could substitute the money to be paid for leisure for buying something more important than it. On the other hand, where passengers fly for business purposes don’t have a choice and thus the number of passengers flying for business doesn’t reduce significantly. Air New Zealand Chief Rob Fyfe said to TVNZ that on a Boeing 737, the difference between making a profit and making a loss is five passengers and they have got to work really hard towards making a profit (TVNZ, 2009). It can be recognised from Rob Fyfe’s statement that a small fluctuation in the number of passengers can decide the outcome.

The profits for Air New Zealand were reduced as result of downturn of New Zealand’s economy which was a part of global economic crisis by then. Companies try to cut down costs during the period of economic distress to reduce the impact of the loss. As most of the companies did during that particular period, Air New Zealand decided to cut down 200 full time jobs which will save $20 million a year for the company (NZ Herald, 2008). Air New Zealand Chief Rob Fyfe also said that the number of inbound tourists and inbound visitors has decreased significantly and planes were not flying that frequently (NZ Herald, 2008). The decrease in number of inbound visitors reflects the reason for the loss of Air New Zealand Limited and also depicts the worldwide effect of the global economic crisis. The amount that a company receives for the sale of its output is called its total revenue and the amount that a company pays to buy its inputs in the production of outputs is called its total cost. Profit is a company’s total revenue minus its total cost (Gans, 2008, p. 271). Hence, cutting down jobs was a wise decision by Air New Zealand as a business to sustain its economic position as it will reduce the cost of doing business which will eventually help in increasing profit for the company.

The cut down of jobs contribute towards increasing unemployment. “A person is unemployed if he or she is on temporary layoff, is looking for a job, or is waiting to start a new job”(Gans, 2008, p. 637). During recession, likewise Air New Zealand other big companies which are an important part of New Zealand’s economy and are suffering through the effects of recession also cut down jobs and eventually result in increasing the unemployment rate of the country. Some companies also try to move their operations from their home country to a foreign country where the cost of operation is lower. A substantial displacement of employment in some countries has produced poverty, refugees to societies in the north and local conflicts (Synott, 2009, p. 215). Rise in unemployment leads to a decrease in family incomes and results in low standards of living. Research has suggested that children in families where parents are unemployed have higher rates of psychosomatic symptoms, chronic diseases and low well being and further research suggested that these negative effects may be mediated by means of the force that unemployment has on parents mental health, with the mental sorrow associated with decreased social position, interruption of roles, loss of self respect and increased financial damage, all impacting negatively on parent’s emotional state (Unemployment Rates, 2009).

“One of the Ten Lessons from Economics is that the society faces a short-run trade-off between inflation and unemployment”(Gans, 2008, p. 818). It means that policymakers choose to increase the supply of money in the market which increases the quantity of goods and services demanded at any price and thus decrease unemployment as more workers are needed for producing the increased demanded quantity for short period of time. In the above process, inflation is increased due to an increase in money supply reflecting a price hike for goods and services. An average household with the same income as before inflation has to spend more money buying basic goods and services. It also means that the most affected stratum of society is the middle class as majority of their savings is in the form of cash. On contrary, the higher class are not affected on a larger scale as their savings are mostly in the form of property and the lower class who strive to make a saving and improve their economic condition are left with no scope for it at all.

It was observed in New Zealand that crime rate was raised as unemployment was rising. “Crime is a symptom of a society in distress; the root cause is unemployment – causing poverty, disconnection from society, and a lack of positive ways to spend one’s time”(Marty, 2009). In worst cases it may also lead to an urge of committing suicide (NZ Ahead, 2010). In other parts of the world unemployment can also be related with other severe issues like youngsters easily getting influenced by anti-social groups spreading terrorism. Poverty led by unemployment deprives the option of education from the masses of Islamic countries which mostly get influenced towards terrorist activities. U.S. Secretary of State Hillary Clinton had stated that terrorism cannot be stopped or ideologies of violent extremism cannot be overpowered when hundreds of millions of young people see a future with no jobs, no hope and no way ever to catch up with the developed world around them (The Nation, 2010). Increasing terrorist activities results in a threat to global security and leaves a sense of fear in society.

Looking at the above issues and discussion, it can be concluded that the impact of recession can be noticed on all levels i.e. global level, national level and community level. Everyone from large scale businesses to a normal wage earning individual feels the strain of Global Recession. Businesses are observed to be hit economically by the recession and individuals are hit both economically and socially. In the course of reducing the damage of recession, businesses tend to take some actions which affect common man’s life vigorously including in some serious dimensions which might prevent them obeying their social responsibility and even supporting anti-social elements that disturb the existing peace in the community. It can be drawn from the above conditions that all the economies around the globe get affected in a certain way during the recession and lead towards global crisis. In order to minimise the impact of the global recession, countries should initiate a co-operative movement. Countries with a stable economy should help the economically and socially backward countries during the period of economic downturn.


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