case study on Recession of 2008- 09 & real gdp recent history

1. The Recession of 2008-
2009

1. The Recession of 2008-2009
• In 2008-2009, the US economy experienced a financial crisis and a serve
downturn in economy. There was a boom in part, fuelled by low interest loan
in the housing market. In the aftermath of the recession of 2001, the Federal
Reserve lowered interest rate to historically low level.
• In addition to lower interest rate, various developments in the mortgage
market made it easier for subprime borrowers. One development was
securitization- the process by which a financial institution makes loan and
then bundles them into financial instruments called mortgage-backed
securities and then these securities were sold to other institutions.

• Some government policies forces drove up housing demand and
housing prices, proved unsustainable. From 2006 to 2009, 30% rise in
housing price nationwide.

• In this case, however, the price decline had two related consequences:
1.During the housing boom, many homeowners had bought their houses with
mostly borrowed money and minimal down payments. When the houses prices
declined, these house owners were underwater. Many of this owners stopped
paying their loans. The banks servicing the mortgages responded to these
defaults by taking the houses away and selling them off. The bank goal was to
recoup whatever they could from bad loans.

2.Various financial institutions that owned mortgage-backed securities suffered
huge losses. In essence by borrowing large sums to buy high-risk mortgage,
these companies had bet that house prices would keep raising but this bet
turned bad, because of these large losses, many financial institutions didn’t
have fund to loan out.
• As a result of all these events, the country experienced a large shift in
aggregate demand. Real GDP and employment falls sharply. Real GDP
declined almost 4% between fourth quarters of 2007.

• The unemployment rate rose from 4.4% in May 2007 to 10.1% in oct 2010.
• For overcoming this US government made three policies:
1.The fed cut its target for the federal funds rate from 5.25% in sep 2007 to
absolute zero in dec 2008. The federal bank also started buying mortgage-
securities from in open market operations. By purchasing these from banking
systems, the fed provided banks with additional funds that the banks would
makes loans more readily available.

2. In oct 2008, congress appropriated $700 billion for the treasury to use to
rescue financial system. Much of these funds were used for equity injections
into banks. Treasury put funds into banking system, which banks could use to
make loans.
3. When Barack Obama become president in jan 2009 his first initiative was a
large increase in government spending and signed $787 billion stimulus bill on
feb 2009.

2.Real GDP Recent History…..
• In figure,
quarterly data
on real GDP
from the US
economy
since 1965.

• The US real GDP of the US
economy in 2009 was almost
four times its 1965 level. Put
differently, the output of goods
and services produced in the US
has grown average about 3% per
year. This continued growth in
real GDP enables the typical
American to enjoy greater
economic prosperity than his or
her parents and grandparents did.

• A second feature of GDP data is
that growth is not steady. The
upward climb of real GDP
occasionally interrupted by
periods during which GDP
declines, called recessions.
Recessions are associated not
only with lower incomes but
also with other forms of
economic distress: rising
unemployment, falling profits
etc.

Define Real GDP and Nominal GDP? Which is a better measure of
economic well-being? Why?
• GDP: It is the total market value of all final goods and services produced
within a country in a given period of time.
• Nominal GDP values the production of goods and services at current
prices.
• Real GDP values the production of goods and services at constant
prices.

• An accurate view of the economy requires adjusting nominal to real
GDP by using the GDP deflator.
• Real GDP is a better measure of economic well-being.
Reasons:
• Nominal GDP gives value of goods and services at current prices but
Real GDP gives value at constant prices so that in nominal GDP values
which are showed that values are calculated with increased price (known
as inflation). So Nominal GDP doesn’t provide real values.

• In calculation of real GDP one year price is consider as price of base year
so that no effect of inflation on real GDP which provides real values.
• It provides real quantity and real price so its consider as a better measure
of economic well-being.
• GDP deflator can be calculated to measure changes in real and nominal
GDP.

3.Near empty restaurant and
off season miniature Golf…….

3.Near empty restaurant and off season
miniature Golf…….
SUMMARY
Empty restaurant
• STAYING open can be profitable , even with many tables open.
• Restaurant owner must keep in mind the distinction between fixed and variable cost,
shutting during lunch could not reduce this cost.
• It might seem that the revenue from few customer could not possibly cover the cost of
running the restaurant.
• This cost are sunk( not recoverable in future) in short run
• The owner shut down the restaurant at lunch time only if the revenue from few lunch
time customer fails to cover restaurant’ s variable cost
• Variable cost are changeable

Problems of empty restaurant :
• A restaurant is not open in the lunch time
• Owner must keep in mind that distinction between fixed and variable cost
• These cost are sunk in short run
• Many of the restaurant’s kitchen , equipment , table, plate, silverware, and
so on are fixed
• Setting down during lunch would not reduce these cost
• Variable cost , the price of additional food and the wages of the extra staff
are relevant

Alternatives
The owner shut down restaurant at the lunch time only if the revenue from the
few lunching customers fails to cover the restaurants variable cost

Comparison for empty restaurant:
• During lunch time in India the employees, subordinates etc. cannot easily go for lunch in restaurants as
they are expensive ,time consuming and other such factors are taken into consideration before going for
lunch on office time
• In foreign country like USA there is a easily availability of street food which is equal to restaurants and so
employees do choose to go there as they are satisfactory in terms of pricing ,quality and fast service
compared to India
• serving lunch in café is majorly not seen in India while in USA both is possible at same time
• in India most of people are from corporate level and they do not get time in afternoon for lunch so in India
it is advisable to shut down during lunch time while in USA it is not preferable because they cover their
variable cost and make some profit and Indian people prefer dinner rather than lunch

Recommendation
In India if the restaurant is kept open than variable cost is more
• Sunk cost is not recoverable in future
• So we advise that the restaurant in India should be kept closed during
lunch time

Conclusion
• So we advise that the restaurant in India should be kept closed
during lunch time .
• While in USA restaurants should be open in lunch time because
it can generate revenue.

SUMMARY
Miniature golf
• A miniature golf remains empty because owners even bother miniature
golf to stay open.
• Belief of an owner that few player could not possibly cover the cost of
running the restaurant .
• Cost of land and building are fixed in miniature golf .
• Miniature golf should be open for business only during those time of the
year when its exceeds its variable cost .

Problems of miniature golf
• A miniature golf is not open in season time
• Owner must keep in mind the distinction between fixed cost and
variable cost
• These cost are sunk in the short run
• Miniature golf cost are not fixed like land
• Shutting down during season time would not reduce the costs

• Alternatives
The owner shuts down the miniature golf at season time only if
the revenue from the few player fails to cover the miniature golf
variable cost

Comparison of miniature golf
In India it is not possible to have a miniature golf club because it is mostly prefer by
high class society and they are mostly visited in weekends.
People mostly in India do not prefer to play golf while in USA golf is majorly
played and also it is considered as a status symbol among rich people.
Miniature golf is mostly seen in five stars and seven starts hotel in India like J.W
Mariott , Taj By Viventa Etc And That Are Much More Expensive Which Cannot
Be Afford Much But In USA It Is Mostly Seen In The Restaurants And Café Of
California, Las Vegas, San Francisco Etc.

Recommendation
Miniature golf should be open in lunch time in USA because more
consumers come in restaurant while in India it is least seen
As it increase the variable cost it is most preferred by USA

Conclusion
In India miniature golf course should be closed in lunch time
because people mostly spend their time in busy schedule and in USA
it should be open in lunch time because it can generate revenue

case study on Recession of 2008- 09 & real gdp recent history

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case study on Recession of 2008- 09 & real gdp recent history