A comparison of the difference between recession and depression in economics; also, the similarities of recession vs depression would be listed.
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Is recession and depression same?
Recession and depression are not one and the same thing. The main difference between recession and depression is that during a recession, it is possible for the economy to recover and grow, but in depression, there is no such possibility.
A recession is usually defined as an economic condition where, for some time period, the country experiences negative GDP growth. Depression refers to a long and general economic decline, where the economy is shrinking day by day.
What is recession?
The term “recession” refers to an economic condition where there is less production, trade, consumer spending, investment, etc occurring in an economy compared to previous periods.
A few ways to illustrate this would be how during boom times of economic growth, more people have jobs at their respective companies or are doing work for themselves, thus more money to spend on products, investment of savings, etc. Furthermore, there are more jobs available which allow for population growth in areas where producers are active.
Conversely, during economic recessions, unemployment rates are higher and an increasing number of people are receiving fewer hours or having to work part-time jobs rather than the full-time positions they had previously held.
Consumers spend less money on products due to their lack of disposable income thus sales decrease for businesses who sell these items, in turn making it difficult for them to pay workers and thus lay off employees.
Investment in projects is reduced since companies hold back on reallocating capital when business is slow or problems arise with their finished product reaching the marketplace. This causes shareholders to lose out too since the demand for the stocks they own falls thus share prices decrease.
With less spending during recessions, producers are forced to sell their goods at lower prices compared to the pre-recession period due to overproduction which in turn eats into their profits. The root cause behind this issue is because of too much investment in factories and staff by corporations hoping for economic growth to lift demand for their products further than it already has or specific projects failing to lead to bad debts costing companies money.
This results in them prioritizing cost-cutting measures such as layoffs, factory closures, etc. in order to avoid bankruptcy, which would cause even more problems in regards to reviving business since they have fewer employees working there now with an even smaller budget allocated towards rehiring people once again.
What is depression?
The term “depression” is used to describe an economic situation where there is a large amount of unemployment, little demand for goods and services which leads to lower prices, and negative economic growth.
This means that the economy has taken such a turn for the worst that it cannot get back up on its own without government intervention such as regulations or stimulus spending so companies can get their employees back without having to rely entirely on automation since they don’t have enough money to hire more people at this point.
While recessions affect almost everyone in one way or another, depressions tend to hit some people harder than others usually depending on various demographic factors such as age and ethnic background. For example, young workers who are new in the workforce may struggle when finding a job since there are usually fewer available during these periods of economic hardship.
Recession vs Depression – Differences and Similarities
Many people want to know the difference between recession and depression, especially because of the way they affect individuals and their families. The economic condition in a country can have an immense impact on a large section of society.
Similarities between recession vs depression
- Both can be caused by external factors such as high interest rates, bad consumption or investment decisions, etc.
- Investors may experience a push to reassess their portfolio which may lead to layoffs and job loss in the household sector.
- The government will usually try to intervene through either increasing spending or cutting taxes during these times.
- Both can be measured through the GDP of a country which is calculated as the total market value of all goods and services produced in a given period of time.
- The business cycle will usually show an increase initially followed by a slow down then a rapid increase then a slowdown or contraction depending on where you are within that business cycle over a period of time.
- There are 3 phases in the business cycle which include expansion, peak, and contraction where a recession is considered to be a significant decline in economic activity.
- Depression can lead to revolutions and civil wars based on the economic conditions where people may fight over scarce resources which could contribute to war or violent conflicts within a country.
Difference between recession and depression
- The unemployment rate will be higher during a recession thus putting more strain on households thus creating a negative feedback loop where people have less money to spend and that leads to a slowdown in the overall economy which leads to more layoffs, etc. while during a depression there is a high level of unemployment which can lead to social instability.
- A depression is more severe where the GDP falls by 10% or more over a period of two years whereas recession causes an economic slowdown that only lasts for 6 months or less with effects not as severe as that of a depression.
- There are 3 phases in the business cycle where during a recession there are two phases namely the contraction phase where GDP starts to decrease over a period of months followed by the trough which is considered to be the lowest point of economic growth before starting to increase again. The second phase known as the expansion phase shows an increasing economy over a period of time until it reaches its peak or potential output where you can see maximum capacity utilization of firms or industries. A depression can be deeper where there is deflation, loss of income and wealth, increase in unemployment rates while the GDP falls by more than 10% over a period of two years.
- There is no official definition on what constitutes a recession nor an agreed upon time limit for it to last whereas there are specific definitions and agreed upon time periods for a depression such as falling GDP, falling employment rates over a period of months, contraction in economic activity as well as deflationary pressures.
- Monetary policy can be used to strengthen the economy during times of recession thus eliminating the risk of falling into a depression whereas monetary policy has very little impact on ending or preventing a depression.
- Monetary policy will involve reducing interest rates which can help in increasing borrowing, spending and investing activities thus stimulating economic growth where fiscal policy involves the use of government expenditure to increase economic activity during an economic slowdown or recession whereas there is no clear evidence that fiscal policies have any sort of effect on preventing or ending a depression.
- There are no official changes to the way we calculate GDP during a depression whereas there are specific ways of calculating the GDP during a recession with different statistical methods including using real or nominal values.
- The most common definition is an economic slowdown where GDP declines over two consecutive quarters (six months) followed by recovery whereas a depression is considered to be GDP declining by more than 10% also followed by a recovery.
Recession vs Depression Effects on the Economy
The effects of a recession can be felt on various levels such as employment, business activity, personal income, spending behaviors, etc. with several countries experiencing recessions at different periods of time; these are made worst by depression. Depression can lead to revolutions and civil wars based on the economic conditions where people may fight over scarce resources which could contribute to war or violent conflicts within a country.
Economic depression means that the economy has taken such a turn for the worst that it cannot get back up on its own without government intervention such as regulations or stimulus spending so companies can get their employees back without having to rely entirely on automation since they don’t have enough money to hire more people at this point.
The unemployment rate is higher during a depression thus putting more strain on household income and that leads to a negative feedback loop where people have less money to spend which leads to a slowdown in the overall economy which leads to more layoffs, etc.
During a recession, there is an increase in unemployment however it does not lead to the same social instability as seen in depression periods.
There are three phases of the business cycle during a recession but in a depression, there are no clear phases but rather a continuous decline in overall economic activity.
A table showing the differences between recession and depression in economics
A recession is a period of time when the economy experiences a downturn or slowdown
Economic depression is much more severe and refers to an economic contraction that lasts for months.
A recession can be caused due to various factors such as increased costs of production, lack of consumer spending leading to lower sales, higher tax rates resulting in lower disposable income among several others.
Economic depression can be caused by several factors including asset price bubbles, excessive consumer debt levels, deflation, economic shocks, bank failures, and a collapse in demand among several other reasons.
The economy can recover in a recession without intervention
The economy is unable to recover from depression without intervention. The government has to stimulate the economy to help it recover from depression.
In a recession, there is negative growth over 2 consecutive quarters. The GDP declines, as well as an increase in the unemployment rate.
In depression, it is usually very severe with the GDP declining by 10% or more for two consecutive years. The unemployment rate goes up to about 20% and many people cannot even meet their basic needs.
Depression vs Recession Examples
- The great depression of 1929 – started in the United States of America but became worldwide
- The great recession of 2007 to 2009 and affected the whole world.
FAQs on recession vs depression
What is the difference between recession and depression?
A major difference between recession and depression from an economic standpoint is that a recession is just a minor downturn that will inevitably turn around while depression signifies a complete failure of the economy as it currently stands requiring significant changes for things to improve again, if ever.
Therefore it can be said that recessions are nothing more than small hiccups on the way to prosperity while depressions signify large obstacles that will take a lot of effort to overcome.
Which is worse a recession or depression?
A depression is worst than a recession. The term ‘depression’ has been used since the 17th century to describe periods of economic decline which is more extreme than a recession where there is a significant increase in unemployment rates, falling output and investment, homes get repossessed and businesses fail.