What is the Difference between Recession & Depression ?

What is the difference between a recession and a depression . A Recession is a significant decline in economic activity spread across the economy lasting for more than a few months. It is characterized by fall in GDP, fall in income, fall in production, increase in unemployment etc. A common rule of thumb for ascertaining recession is continuous 2 quarters of negative GDP growth. It happens frequently. It normally strikes different countries at different time periods. A recession is a macroeconomic term that refers to a significant decline in general economic activity in a designated region. It is typically recognized after two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators like employment. Recessions are officially declared in the U.S. by a committee of experts at the National Bureau of Economic Research (NBER), who determines the peak and subsequent trough of the business cycle which demonstrates the recession. Recessions are visible in industrial production, employment, real income, and wholesale-retail trade. The working definition of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP), although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession, and uses more frequently reported monthly data to make its decision, so quarterly declines in GDP do not always align with the decision to declare a recession. A Depression refers to phase of economic activity where falling production and incomes lead to fall in demand and therefore fall in prices. Once it starts it is self generating. This is what happened during great depression of 1929–1932. It is recession only but much more severe and long lasting. Rule of thumb for ascertaining depression is a 10% or more decline in GDP. It is not very frequent. When it happens it strikes world economy as a whole. A depression is a severe and prolonged downturn in economic activity. In economics, a depression is commonly defined as an extreme recession that lasts three or more years or leads to a decline in real gross domestic product (GDP) of at least 10 percent. Recession is a very prominent word around the globe since 2008. When an economy slows , production at national level stops and demand becomes low of all goods on an average, recession is said to occur. This happens when cost of raw materials is high, labor is expensive, land acquisition is difficult, electricity is difficult to access, market is distant, transportation is costlier, government isn't supportive and has imposed several taxes or tariffs, or any other reason. Now we apply, basic demand-supply relationship and conclude that due to low production , supply prices go up for a given demand function of the society. At higher prices, not all can consume the same goods and in same quantities as they were doing so earlier. So now people either shift to cheaper substitutes (for example, if wheat becomes expensive people switch to millet which is cheaper) or they reduce their consumption .For example, people spend less on luxuries as more is being spent on subsistence, or do both. This condition over long run is, theoretically, said to adjust by a corresponding decrease in demand such that equilibrium in the market is restored but definitely at a lower price and lower quantity. And this decrease in demand would occur due to too much spending on necessities and not on luxuries. This too much spending is called inflation which is very eminent during recession. It is a known fact that profit margin is lesser for necessary goods and gigantic for luxury goods. As a result, sellers and producers of daily commodities won't grow richer by high prices whereas the producers of luxury goods would definitely be on the losing side. This loss in businesses would begin a vicious circle. This is so because workers would demand higher wages due to rise in prices and producers won't have any remaining surplus thereafter, for the next round of production. Thus, producers are unable to lower their prices as their total cost has increased (due to increased wages, rise in prices of goods which were being used as inputs, transportation cost) and therefore, increase the prices further. This further encourages the workers to ask for higher wages and a wage-price spiral settles in the economy which encourages the producers to expel few workers so as to minimize cost as production has also gone down and expenses are already sky rocketing. However like I mentioned before eventually an economy is assumed to come out of this due to corrective measures. For example, government interventions like subsidizing daily commodities, boosting the manufacturing sector by providing cheaper loans, restricting imports to help the domestic producers sell their produce in domestic market without competition and so on. If these corrective measures are timely and citizens are rationally acting towards it, then a crisis is said to be a recession as there's optimism that economy can overcome these challenges. But sometimes, overhead costs are already too high (say, producers didn't invest much in stock market then yields will be smaller or took too many loans during production) and government is lethargic in reacting. This makes a recession a depression as then the economy becomes so low-footed that remedies prove to be ineffective. A depression is simply a longer, and more severe recession. All economies go through cycles of booms and recessions. Thus, recessions are a normal part of economics. A recession is typically when the GDP - Gross Domestic Product - reduces for two or more consecutive quarters (6 months). A recession is an economic slowdown; when companies are cutting down on production, due to over-supply, or perhaps lack of demand. If companies are cutting down on supply, they might not need more workers, and thus they stop hiring or laying off workers. That starts off a new spiral of low demand. (Because if workers are laid off, their income reduces and if income reduces, consumption of goods reduces, which reduces demand, and companies further cut down on production) While a recession can be considered a normal part of an economic cycle, depressions are not. They are more severe, and longer. There is usually a very high-unemployment rate, a severe GDP decline (larger than in the case of a recession), stock market crashes, production decline and other indicators.











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