How Recessions Work

In a经济增长, consumer demand is increasing, overall, more than it is decreasing. Since there isincreasing demand, producers want toincrease supply. To do this, producers have to increase their consumption of other goods and services, including labor. This means there is greater demand for labor, so the labor pool, on the whole, can raise the price of their product (in other words, people can得到报酬more for their work).

Working people with higher incomes have more money to spend on other products, which increases demand even more. If demand is high enough, the price of some things goes up. For example, if there are more travelers than there are seats on airplanes, airlines can raise their prices to decrease demand (this could lead to high inflation if it happened across the board, but in the past decade the U.S. economy has shown the ability to grow steadily while keeping inflation under control). In a growing economy, some consumers and producers will not do well, but most will, so the general feeling about the economy is good.

In such an economy, a lot of consumers tend to makeinvestments: They buy things, such asstock in a company, that they plan to sell at a later date. They know that if the economy keeps going the way it has been, their investments willincrease in value. These consumers figure they will make money just by holding onto the product for a while.

History has proven that an economy will not keep expanding indefinitely -- eventually it will contract for a while. A prolonged period of contraction is known as a recession. If the recession lasts long enough, and is particularly severe, it is known as a depression. In the next section, we'll find out what happens in this sort of economy.