A recession is a natural element of the business cycle that occurs when the economy declines for two consecutive quarters. A depression, on the other hand, is a prolonged decline in economic activity that lasts years rather than months. This makes recessions far more common: in the United States, there have been 33 recessions and only one depression since 1854.
Which is more severe, the recession or the depression?
A recession is a long-term economic downturn that affects a large number of people. A depression is a longer-term, more severe slump.
What is the difference between a recession and the Great Depression?
- A recession and a depression are both times when the economy shrinks, but their severity, duration, and total impact are different.
- A recession is a prolonged drop in economic activity that affects all sectors of the economy.
- A depression is a more severe economic slump, and in the United States, there has only been one: the Great Depression, which lasted from 1929 to 1939.
Is depression caused by a recession?
That is an excellent question. Unfortunately, there isn’t a standard answer, however there is a well-known joke about the difference between the two that economists like to tell. But we’ll return to that eventually.
Let’s start with a definition of recession. As previously stated, there are various widely accepted definitions of arecession. Journalists, for example, frequently define a recession as two consecutive quarters of real (inflation adjusted) gross domestic product losses (GDP).
Economists have different definitions. Economists use the National Bureau of Economic Research’s (NBER) monthly business cycle peaks and troughs to identify periods of expansion and recession. Starting with the December 1854 trough, the NBER website tracks the peaks and troughs in economic activity. A recession, according to the website, is defined as:
A recession is a widespread drop in economic activity that lasts more than a few months and is manifested in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins when the economy reaches its peak of activity and concludes when it hits its lowest point. The economy is expanding between the trough and the peak. The natural state of the economy is expansion; most recessions are temporary, and they have been uncommon in recent decades.
While there is no universally accepted definition for depression, it is generally said to as a more severe form of recession. Gregory Mankiw (Mankiw 2003) distinguishes between the two in his popular intermediate macroeconomics textbook:
Real GDP declines on a regular basis, the most striking example being in the early 1930s. If the period is moderate, it is referred to as a recession; if it is more severe, it is referred to as a depression.
As Mankiw pointed out, the Great Depression was possibly the most famous economic slump in US (and world) history, spanning at least through the 1930s and into the early 1940s, a period that actually contains two severe economic downturns. Using NBER business cycle dates, the Great Depression’s first slump began in August 1929 and lasted 43 months, until March 1933, significantly longer than any other contraction in the twentieth century. The economy then expanded for 21 months, from March 1933 to May 1937, before experiencing another dip, this time for 13 months, from May 1937 to June 1938.
Examining the annual growth rates of real GDP from 1930 to 2006 is a quick way to highlight the differences in the severity of economic contractions associated with recessions (in chained year 2000dollars). The economy’s annual growth or decrease is depicted in Chart 1. The gray bars show recessions identified by the National Bureau of Economic Research. The Great Depression of the 1930s saw the two most severe contractions in output (excluding the post-World War II adjustment from 1945 to 1947).
In a lecture at Washington & Lee University on March 2, 2004, then-Governor and current Fed Chairman Ben Bernanke contrasted the severity of the Great Depression’s initial slump with the most severe post-World War II recession of 1973-1975. The distinctions are striking:
Between 1929 and 1933, when the Depression was at its worst, real output in the United States plummeted by over 30%. According to retroactive research, the unemployment rate grew from roughly 3% to nearly 25% during this time period, and many of those fortunate enough to have a job were only able to work part-time. For example, between 1973 and 1975, in what was likely the most severe post-World War II U.S. recession, real output declined 3.4 percent and the unemployment rate soared from around 4% to around 9%. A steep deflationprices fell at a rate of about 10% per year in the early 1930sas well as a plunging stock market, widespread bank failures, and a spate of defaults and bankruptcies by businesses and households were all aspects of the 1929-33 fall. After Franklin D. Roosevelt’s inauguration in March 1933, the economy recovered, but unemployment remained in double digits for the rest of the decade, with full recovery coming only with the outbreak of World War II. Furthermore, as I will show later, the Depression was global in scale, affecting almost every country on the planet, not just the United States.
While it is clear from the preceding discussion that recessions and depressions are serious matters, some economists have suggested that there is another, more casual approach to describe the difference between a recession and a depression (recall that I promised a joke at the start of this answer):
What occurs when you’re depressed?
Depression is a serious mental condition that can have a significant impact on a person’s life. It can lead to emotions of melancholy, hopelessness, and a loss of interest in activities that linger for a long time. It can also cause physical symptoms like as pain, a change in appetite, and sleep issues.
Was it a depression or a recession in 2008?
- The Great Recession was a period of economic slump that lasted from 2007 to 2009, following the bursting of the housing bubble in the United States and the worldwide financial crisis.
- The Great Recession was the worst economic downturn in the United States since the 1930s’ Great Depression.
- Federal authorities unleashed unprecedented fiscal, monetary, and regulatory policy in reaction to the Great Recession, which some, but not all, credit with the ensuing recovery.
What are the similarities and differences between recessions and depressions?
A recession is similar to an economic depression, but it is far more severe and lasts much longer. A depression not only lasts longer, but its repercussions can be far-reaching and last long after the economy has recovered.
The NBER does not have a precise definition of a depression, although it does note that the Great Depression of the 1920s and 1930s was the most recent occurrence usually viewed as a depression. During the Great Depression, the national unemployment rate rose to about 25%, while the economy shrank by 27%. A depression can also have a significant impact on international trade and cause worldwide devastation.
The Great Depression was the country’s longest and most catastrophic financial disaster. It began as a recession, with a drop in consumer spending and, as a result, a drop in manufacturing, but it quickly morphed into a depression that spread over the globe. Even those who kept their employment saw their earnings plummet by up to a third.
Why wasn’t 2008 a depression year?
The price level decreased by 22% and real GDP plummeted by 31% during the Great Depression, which lasted from 1929 to 1933. The price level climbed slowly during the 2008-2009 recession, and real GDP fell by less than 4%. For a variety of factors, the 2008-2009 recession was substantially milder than the Great Depression:
- Bank failures, a 25% reduction in the quantity of money, and Fed inaction culminated in a collapse of aggregate demand during the Great Depression. The sluggish adjustment of money pay rates and the price level resulted in massive drops in real GDP and employment.
- During the 2008 financial crisis, the Federal Reserve bailed out struggling financial institutions and quadrupled the monetary base, causing the money supply to rise. The expanding supply of money, when combined with greater government spending, restricted the fall in aggregate demand, resulting in lower decreases in employment and real GDP. (21)
The 20082009 Recession
Real GDP peaked at $15 trillion in 2008, with a price level of 99. Real GDP had declined to $14.3 trillion in the second quarter of 2009, while the price level had climbed to 100. In 2009, a recessionary void formed. The financial crisis, which began in 2007 and worsened in 2008, reduced the supply of loanable funds, resulting in a drop in investment. Construction investment, in particular, has plummeted. As a result of the worldwide economic downturn, demand for U.S. exports fell, and this component of aggregate demand fell as well. A huge injection of spending by the US government helped to soften the decline in aggregate demand, but it did not stop it from falling.
The supply of aggregates has also dropped. A decline in aggregate supply was caused by two causes in 2007: a spike in oil costs and a rise in the money wage rate. (21)
Was the Great Recession as bad as the Depression?
crisis. The Great Depression, on the other hand, occurred in the United States between 1929 and 1930, and began with a sharp drop in stock indices (Black Tuesday)
- The Great Depression was significantly worse and had a lot longer lasting impact than the Great Recession in terms of length and depth. The Great Recession lasted roughly 19 months, during which time the US economy shrank by 4%. The Great Depression, on the other hand, lasted nearly a decade and caused a 30% contraction in the US economy.
- One of the elements that resulted in two drastically different outcomes was the Fed’s response to both incidents. The Fed’s action in 1929 hampered economic activity in the United States, whereas in 2008, the Fed offered monetary stimulus to help the economy recover.
- The Fed learned from its failures during the Great Depression, which helped them cope considerably better with the repercussions of the Great Recession.