Economic Recession and Depression - Definition and Difference

Economics is the science that deals with the production, distribution and consumption of goods and services that a society produces. It affects all walks of life, be it social, political or financial. Economic growth is very important as it is the pillar of any country. If there is proper economic growth, it means that businesses in the country are earning profit. The rate of employment is high and the country is strong on forex reserves. However, growth can't be unbridled. The economy also goes through a cycle of 'peaks' and 'troughs' that constitutes the 'Economic Cycle' or the 'Business Cycle'. While the peaks denote periods of economic growth, the troughs are the downturns that the economy goes through. The downturns are of two types. While one is known as Economic Depression, the other, less severe one is called Economic Recession.

Definition of Economic Recession

Some experts of the markets define economic recession as 'decline in the GDP (Gross Domestic Product) for two or more consecutive quarters'. The GDP of a country is measured on the basis of goods and services produced by a country. Since this definition leaves out other important economic factors like employment rate and consumer confidence, most economists do not like to define economic recession solely on the basis of GDP. The National Bureau of Economic Research (NEBR) is an agency with the authority to declare recession in the US. The NEBR defines economic recession as 'significant decline in the economic activity of the country that lasts for more than a few months'. Since this definition includes a number of variables that are all part of an economic system, the official word on recession from the NEBR usually comes well after the economy has already entered recession.

Definition of Economic Depression

Unlike economic recession, no definition for economic depression has been provided, either by NEBR, or by any economist. However, economic depression is understood as a severe downturn in the economy of a country that lasts for a year or more. GDP is a good indicator of whether we are in recession or depression. If the decline in GDP is greater than 10%, an economy is said to be going through depression. Besides reduction in GDP, an economic depression is characterized by increase in unemployment rates and decrease in the flow of money into the economy. Businesses find it exceedingly difficult to earn profits. As a result they reduce their staff that leads to unemployment. An over all crisis in industry and commerce is felt and defaults in loan repayment and bankruptcies commonly occur during an economic depression.

Difference between Economic Recession and Depression

As both economic recession and depression refer to a slump in economic activity, they have often been used interchangeably. However, it should be understood that both are different mainly in terms of their severity.

While a downturn in the economy for two consecutive quarters can be classified as a recession, economic depression is marked by a more serious and prolonged recession during which the decrease in GDP is 10 % or higher. Hence, even though a country might have more than two consecutive quarters of recession, it can't be said to have entered depression unless the decline in the GDP in all the quarters add up to at least 10%. In simple words, economic depression is more severe than a recession.

The economies of countries are fragile. They are bound to go through a number of minor fluctuations. Hence recessions occur more frequently than economic depressions. For example, the last real depression that the US economy has faced was the Great Depression of the 1930s. However, it has experienced more frequent bouts of recessions.

Since recessions are less severe than economic depressions, countries can easily bounce out of periods of negative growth than when they are going through an economic depression. This is specially true for countries with diverse economies as they have other means of earning revenue when certain sectors of the economy experience a slump.

Economic depression and recession are an inevitable part of any economy. Although they spell difficult times, such dips in economy also encourage businesses to formulate innovative ideas. Job openings in new sectors are created, as certain businesses unable to prosper in normal periods of economic growth may find newer opportunities to grow. Economic depression and recession do not come unannounced. A little bit of alertness and wise investment can act as buffer against the ill effects of an economic slump.