Difference Between Recession and Depression

Introduction

Economists have a long-standing joke that goes, "A recession is when your neighbor loses his job. " Losing employment causes depression.

There is a lack of clarity on their differences because neither definition of the two phrases is widely accepted. If you asked 100 different economists, there would be at least a hundred distinct definitions of recession and depression. The explanation that follows provides a consensus among nearly all economists over how to define these terms and how they differ from one another.

What is Recession?

The term "recession" describes a period in the economic cycle during which the nation's GDP declines for a few quarters. It reflects a temporary slowdown in the economy's activities over several months. It might lead to a decline in GDP, business earnings, industrial production, employment, etc.

Companies can no longer grow their operations and stop hiring new employees when there is a drop in customer demand. This will lead to an increase in unemployment in the economy and occasionally the start of layoffs. The recessionary phase will begin in the interim. This will lead to a further drop in consumer expenditure and possibly a dip in property values.

The recession could cause serious issues for the economy. To overcome this situation, the government may facilitate monetary policies and boost the amount of money in the economy. Reducing taxes and interest rates may make it feasible to increase government expenditures.

What is Depression?

Depression is the word used to describe conditions in which a recession in one or more economies becomes more severe and lasts longer than expected. When there is a negative GDP of 10% or more, sustained for longer than three years, depression is considered to exist.

Price deflation, bankruptcies, bank failures, unemployment, financial crises, business failures, etc. , are all possible outcomes of a depression. It might cause the economy to collapse. The following are the main indicators of depression:

• High unemployment rate.
• The slowdown of economic activity.
• Bankruptcies are rising.
• Reduction in the availability of credit.
• Decline in investments and industrial production.
• Devaluation causes a high degree of currency value changes.

A useful guideline for distinguishing between a depression and a recession is to look at changes in gross national product (GNP). A depression is defined as any economic downturn in which real GDP declines by more than 10 percent, while a recession is defined as an economic downturn of less severity. Using this standard, the most recent depression in the United States occurred between May 1937 and June 1938, with a real GDP decline of 18. 2 percent. If this approach is applied, the Great Depression of the 1930s can be divided into two distinct periods: a period of recovery followed by an extremely severe depression that lasted from August 1929 to March 1933 and a second, less severe depression that occurred between 1937 and 1938.

Since the end of World War II, the United States has not experienced anything close to a depression. The period from November 1973 to March 1975, when real GDP decreased by 4. 9 percent, was the worst recession in the previous sixty years. Using this criterion, countries like Finland and Indonesia have experienced depressions recently.

Key Differences Between Recession and Depression

• A recession is a period of time when the nation's economic activity and GDP decline for a few months. A persistent and severe fall in the nation's economy is known as a depression.
• Recession on a higher level is what depression is.
• In order to qualify as a recession, the gross domestic product (GDP) must be negative for two consecutive quarters. On the other hand, depression lasts longer than three years and is characterized by a 10% or larger decline in the GDP.
• Based on the theory of booms and busts, a recession is regarded as an economic cycle that happens often. In contrast to depression, which is uncommon.
• Different nations experience recessions at different times. On the other hand, the global economy is simultaneously hit by the Depression.

Difference Between Recession and Depression

Conclusion

After careful consideration, we may conclude that any nation's economy is open to both recession and depression. While the recession can be controlled to some extent, the depression is a severe type of recession. Any nation finds it difficult to recover from an economic downturn.