Posts tagged Economics

There is an old joke among economists that describes that the recession occurs when your neighbor loses job and depression occurs when you loses your job.

It is quite difficult to draw a line between the recession and depression because there is not a definition upon which all economists agree. If you would ask 100 different economists to define the terms recession and depression, there is probability that you would get at least 100 different answers. In this article, I will try to summarize both terms and explain the basic differences between them in a way that would make all economists agree upon this.
What is recession?

The definition of a recession that is defined by the newspaper is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters.

However, this definition is unpopular with most economists for two main reasons. First, this definition does not take into consideration about the changes in other variables. For example, this definition ignores any change in the unemployment rate or consumer confidence. Second, when the quarterly data is used, this definition makes it difficult to identify the specific time when a recession begins or ends. It may be possible that a recession that lasts ten months or less may go undetected.

The Business Cycle Dating Committee at the National Bureau of Economic Research (NBER) gives a better way to find out if the recession is taking place. This committee determines the amount of business activity in the economy by observing the things like employment, industrial production, real income and wholesale-retail sales. According to the definition which is done by NBER, a recession is the time when business activity has reached its peak and starts to fall until the time when business activity bottoms out.

What is depression?

Before the Great Depression of the 1930s, any slump in economic activity was referred to as a depression. The term recession was developed during this period to differentiate periods like the 1930s from smaller economic declines that occurred in 1910 and 1913. So a depression is the downturn in economic activity that lasts longer and has a larger decline in business activity.

The Difference

So the question is how we can tell the difference between a recession and a depression? A good way to determine the difference between a recession and a depression is to look at the changes in GNP. A depression is any economic slump where real GDP goes down by more than 10 percent and a recession is an economic downturn that is less severe.