Recession? Depression? Whats the difference?

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Recession? Depression? Whats the difference?

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There is an old joke among economists that states: A recession is when your neighbor loses his job. A depression is when you lose your job. The difference between the two terms is not very well understood for one simple reason: There is not a universally agreed upon definition. If you ask 100 different economists to define the terms recession and depression, you would get at least 100 different answers. I will try to summarize both terms and explain the differences between them in a way that almost all economists could agree with. Recession: The Newspaper Definition The standard newspaper definition of a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters. This definition is unpopular with most economists for two main reasons. First, this definition does not take into consideration changes in other variables. For example this definition ignores any changes in the unemployment rate or consumer confidence.

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Before the Great Depression of the 1930s any downturn in economic activity was referred to as a depression. The term recession was developed to differentiate periods like the 1930s from smaller economic declines that occurred in 1910 and 1913. A depression is simply a recession that lasts longer and has a larger decline in business activity. A good rule of thumb for determining the difference between a recession and a depression is to look at the changes in Gross National Product. A depression is any economic downturn where real Gross Domestic Product declines by more than 10 percent. Gross Domestic Product (GDP) is the total amount of goods and services produced in the United States in a year and is calculated by adding together all final market values. By this yardstick, the last depression in the United States was from May 1937 to June 1938, where real GDP declined by 18.2 percent.

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