Causes of the Great Recession

¶ … Great Recession

the cause of great recession

The 2007 recession comes out as a puzzle to economist presently even for a developed country whose institutions are efficient. In the case of the recession, there may have been no clear indication that economic growth stagnation can result with the levels of growth prevailing in the preceding years. The factors causing this recession are seen to come from a series of shock that lasted longer in effect contributing to longer and severe effects.

Factors Contributing to the Great 2007 Recession

In the years before the recession period, there seem to be a disparity in the level of labor productivity and, wage levels. The increase in labor productivity comes from technological advancement and is not reflective of the purchasing power of labor through wage increases. Market clearing occurs where the factors of production receive remuneration equal to production. In the case of the period before the recession, although the labor productivity was rising, wages remain fixed. This brings in inequality in the economy making it difficult to sustain production economic growth without hitches.

With the increase in productivity in the U.S. economic, the need to find market for the produce becomes necessary. The stagnant growth of the U.S. population necessitates seeking foreign market where producer present their excess output. The global economy was experiencing difficulties in growth of wages subsequently restricting demand in the global product market. U.S. products also face low demand in foreign markets owing to low prices that make it difficult to compete.

The government policy to resolve the issues in the labor is a contributing factor to the recession. The institution of policies to develop more industries and hire more people faced a difficulty of restructuring the market. The change that is necessary in terms of training and changing industry was not immediate. In the U.S. economy, those with mortgages suffered a loss of financing measures following the restructuring. The U.S. government shift bail out individuals and firms on the verge of bankruptcy was pushing the economy to a gradual halt.

The sudden increases in supply require demand that will remunerate the factors of production. Seeking foreign markets for the products resulted in failure attributable to market price inadequacies. Production activities easily came to a halt since producer confidence was eliminated. For investors to allocate productive factors of production, the need for returns acts as a confidence builder. The failing demand and insufficiency of demand from foreign market result in erosion of investor confidence thus subjecting possible economic growth to failure.