Recession Vs Depression – Differences & Examples

Recession Vs Depression: Differences & Examples

Recession Vs Depression: A recession lasts between 2 to 18 months. Depression is a rare economic contraction and it lasts for years (sometimes decades).

Recessions are defined by a drop in output (a downward trend) and decreasing employment and recession is a phase of the business cycle. Depression is a significant downturn in the business cycle that is much more severe than a downward trend.

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What is the recession? 

A recession means a period of negative or very weak economic growth.

It is very important to define recession technically. When we technically define the recession, “it is the period of minimum two consecutive quarters of negative economic growth rate”. Here usually economic growth is determined by the growth of the Gross Domestic Product (GDP).

But some well-reputed organizations have defined the recession differently. As an example, according to the National Bureau of Economic Research (NBER), recession means a period of a minimum of more than a few consecutive months with significant economic decline.

When an economy with a recession, its aggregate production is declined or increases very slowly, and unemployment is increased significantly. Because the output level of the business organizations is decreased and then they have to lay off employees. As result of losing employment, people reduce their private consumption expenditures such as buying a car, or house.

Recessions are part of the economic cycle. There are 4 phases of the business cycle. They are expansion, peak, recession, and trough. Among them, the recession is the period where the economy moves from a peak to a trough.

Business  cycle
Business cycle

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Characteristics of a recession

1. The companies lay off employees as a result of decreasing demand for their products. So, unemployment in the economy is increasing in a recession.

2. Since companies cut their expenses, the wages of the employees are decreased.

3. During a recession, the purchasing power of the people is decreasing and people are more cautious about making big purchases. So, demand for homes is decreased and then home prices and sales are falling.

4. Stock market decline. Because the purchasing power of the investors is decreasing and investors are more cautious about do investments.

5. During a recession, GDP is decreasing. Because as a result of the above factors, private consumption, exports, and investment in the country are decreasing.

The latest example of the recession – Great Recession

Financial Crisis in 2008 which is a recession that happened in the United States. Financial Crisis in 2008 is called a subprime mortgage crisis also (Duignan, 2019). It affected all elements of the financial system in the countries. It has happened in the Housing Market in the United States and it was the main cause for this crisis.

In 2001, the Federal Reserve which is the Central Bank of the United States anticipated a mild recession and reduced interest rates for that. After that, Banks were able to lend to customers at a lower interest rate and demand for credit was increased. Then customers are motivated to purchase durable goods which are houses, appliances, and automobiles. It was most affected by the Housing Scheme and home prices increase as a result of that. This is the Housing Bubble in the United States in 2008 and it was the reason for having the financial crisis in 2008.

The latest example of the recession – Great Recession

What is the depression?

Depression is a rare economic contraction and it lasts for years.  Depression can impact several countries simultaneously. It is more severe than a recession. Especially a depression lasts longer period than a recession.

Depression is a dip in the economy that is much more severe than a normal downward trend. During a depression, industrial production falls, people are out of work, construction slows down, and trade and capital flow decrease.

Characteristics of the depression

1. Critical GDP decreases: As an example, during the period of 1929 to 1933, US real GDP was fallen from 29 percent.

2. Skyrocketing unemployment: Unemployment is seriously high. There was nearly 25 percent unemployment in other words, 12.8 million people were unemployed during the great depression.

3. Plummeting wages: Since companies cut their expenses, the wages of the employees are seriously decreased. During the period of 1929 to 1933, wages decreased by an average of 42.5 percent.

The latest example of the depression – Great Depression

The latest example of the depression is the “Great Depression”. The Great Depression was a worldwide economic downturn that began in 1929 and lasted until about 1939. The National Bureau of Economic Analysis claims that the Great Depression was a result of two recessions combined. August 1929 to March 1933, or 43 months, made up the first. From May 1937 through June 1939, the following lasted 13 months. The steep downturn continued for a total of roughly ten years. 

What are the differences between a recession and a depression?

1. Recessions are defined by a drop in output (a downward trend) and decreasing employment and recession is a phase of the business cycle. Depression is a significant downturn in the business cycle that is much more severe than a downward trend.

2. A recession lasts between 2 to 18 months. Depression is a rare economic contraction and it lasts for years (sometimes decades).

3. A recession is a phase of the business cycle. Since World War II, there have been 13 economic recessions. There have been 34 recessions since 1854. Economic depressions are very rare. The last one was the “Great Depression”. The Great Depression was a worldwide economic downturn that began in 1929 and lasted until about 1939.

4. A recession can be limited to one economy. Depression has a global reach.

5. During a recession, GDP decline can differ from -1% to -10%. During a depression, GDP decline can be higher than -10%.

6. Private investment and private consumption are decreased during a recession. Global trade, capital movements, and construction are decreased during a depression.

What are the differences between a recession and a depression?

Great Recession Vs. Great Depression

The following table compares the negative economic consequences of the great recession and the great depression. During the great recession, the peak GDP decline was -4.3 percent and during the great depression, the peak GDP decline was -29 percent. During the great recession, peak unemployment was 10 percent and during the great depression, peak unemployment was 25 percent.

Great Recession Vs. Great Depression

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