Difference between Recession and Depression
For most people, a recession and a depression mean one and the same thing: bad news. While both periods do result in increased financial hardship for many people, they are actually separate events that do not occur at the same time, although they are related. Confused? This comparison article should make things clearer.
Recession has been defined as a decline in the gross domestic product or GDP. Basically the GDP is how much money is made by selling American goods outside of U.S. borders. This period typically lasts for two consecutive quarters or more, and is marked by a severe economic downturn. Still others define it as an occurrence in which a serious decline in economic activity makes its impact felt on the economy, and to the GDP, people’s incomes, employment, industrial production, and sales of goods. Recessions are also almost always characterized by unemployment.
A depression on the other hand is a recession of a particularly prolonged and severe period wherein the GDP goes down by more than 10 points. An example of this event was the GDP drop of more than 30 % from 1929 to 1933, with an employment rate high of only 25% by 1933.
Recessions are typically measured via the GDP. During such times, business slows down drastically for a period, and the output is greatly reduced. Unemployment becomes increasingly prevalent, and many companies have no choice but to file for bankruptcy.
A depression on the other hand is a particularly harsh recession, in which the key characteristics are a steep reduction in investments and output. In essence, everything that goes on during a recession occurs during a depression as well, only on a much larger scale. Other differences include the length of time and the economic state. A depression tends to last longer and causes more damage to the economy.
Whether it is a recession or a depression, the results are pretty much the same. The economy and financial markets will be affected in the same way, unemployment rates will rise, output will dwindle down to a trickle, and investments will be few and far between. In addition, one would expect to experience more companies filing for bankruptcy, a drop in trade and commerce, and currency fluctuations, all of which point to a massive financial crisis. And this doesn't even account for the long-term effects that this will have on the economy, and health care and retirement programs.
Similarities and Differences
- Defined as a decline in the gross domestic product or GDP
- Typically lasts for two consecutive quarters
- Marked by a severe economic downturn
- Business slows down drastically
- A recession of a particularly prolonged and severe period wherein the GDP goes down by more than 10 points
- Tends to last longer and causes more damage to the economy
- During the great depression of 1929 to 1933, the GDP dropped more than 30 %