Recession Vs. Depression

Before going into deeper analysis of the subject matter, I cannot avoid mentioning the favorite joke of economists on recession and depression. When other people lose their jobs, it's a recession. When you lose yours, it's a depression.. The joke involves some subjective judgment to differentiate recession from depression. Definition of recession and depression follows no ironclad rule. It can be differentiated only by judging the nature of economic downfall and its outcome. Both are similar in few aspects when negative impacts are taken into account. The difference lies only on the effects and the lasting effect of recession and depression. The former lasts for short period while the latter has long-lasting effect. Recession vs. depression has been studied by economists deeply and you can also get a better concept after reading this article.

Let us first study the history of depression and recession. The Great Depression was a severe economic downturn during World War II. It started in the US in the year 1929 and lasted till late 1930s. It had devastating effects and gradually showed far flung effects world wide. Economic slowdown with decrease in profit price and increase in the rate of unemployment were prominent during this term. Now that was the period when the globe was worst affected by long-lasting depression. In December 2007, the US economy was affected by recession. This was a period of financial crisis. The year 2007-2010 is referred as The Great Recession. The effects were globalized with pronounced deceleration of economic activity.

Recession Vs. Depression - Differences

Recession is usually measured in terms of Gross Domestic Product (GDP). It is general a slowdown of business activity for a particular period of time. It can also be defined as a contraction in business cycle and decline in Gross Domestic Product for two consecutive quarters. The National Bureau of Economic Statistics (NBER), describes economic recession in the following words. 'A recession occurs when a significant decline in the economic activity is spread across the economy, lasting more than a few months, normally visible to real GDP, real income, employment, industrial production, and wholesale sales.' The signs of recession are reduced output, increase in the rate of unemployment, low corporate profits and increased rate of bankruptcies. The worst recession in the last 60 years was seen in the US that started in November 1973 and ended in March 1975, during which the GDP fell by 4.9%

Depression is a severe form of recession that involves complete or deep decline in investment and output. All the effects of recession are seen in depression as well only taking a larger shape. The thumb rule for determining economic depression is decline in real GDP by 10% or more. Although there's no yardstick for defining depression, it is normally accepted that recession lasting for more than 3 years turns to be depression. The last depression in the US started in August 1929 and lasted till 1938 during which the GDP fell to 18.2 percent.

Difference between recession and depression can be judged by the time frame and economic conditions. Depression is sustained and a more severe downturn in the economy. Recession vs. depression thus can be differentiated on the basic of its effect on the business economy, fall in the rate of GDP and the period of lasting.

Recession Vs. Depression - Similarities

Whatever be the nature of economic downfall, either recession or depression, the effects on the economy and financial market is more or less the same. Abnormal increase in unemployment, shrinking output and investment are the worst effects of this slowdown. Rising bankruptcies, financial crisis, reduced amount of trade and commerce are also the outcome of recession and depression. Increase in rate of high volatile currency, fluctuations in money (devaluations) and price deflation accentuate financial crisis. These two conditions in the market also have wide reaching effects like low consumer confidence, disruption in retirement plans and fall in stock prices. These are the negative aspects which are common for both recession and depression.

Be it recession or depression, the ultimate effect is NEGATIVE and ample time is required for the revival of economic conditions.