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Difference between recession and depression
Recession vs depression:
The slowing down of the economic system or it’s downwards journey can be quite depressing not only to the leaders of a nation but also to the people living in that particular country. This condition serves as a root cause for major financial trouble such as the increase of cost of living, unemployment and other such undesirable events. Recession and depression are two economic terms utilized in reference to this rather miserable state of the economy of which the difference lies within the severity of the condition.
What is recession?
Recession is a term that is used in economics which stands for the process of slowing down of the economic activity of a country. Many elements such as production, as measured by gross domestic product also known as the GDP, employment, investment spending, capacity utilization, household incomes, business profits and inflation get drastically affected and one also witnesses the rising of the bankruptcies and the unemployment rate during such an unfortunate event. A recession often occurs after a drastic supply shock that suddenly changes the price of a commodity or service or after a burst in the economic bubble which results in a burst in trade in products or assets with inflated values. When the Gross Domestic Product of an economy declines continuously for six months, it is considered that the economy is in recession.
What is depression?
A depression in economics can be defined as a sustained downturn in economic activity in one or more economic systems that had continued for a considerable amount of time. Depression is considered as a rather rare phenomena which is characterized by its length, abnormally large increases in unemployment and rather drastic falls in the availability of credit and the like which usually results in a state of major economic catastrophe in a country.
What is the difference between depression and recession?
Most undoubtedly, recession and depression are interrelated with regards to the kind of economic devastation it stirs as well as the many adverse side effects they generate. However, the major difference that differentiates the two is the severity of the economic downfall. Thereby, a depression can be termed as an amplified, lengthened and a more severe form of recession which occurs when a recession state has continued for a prolonged period of time.
Recession occurs when the gross domestic product of an economy declines continuously for six months whereas a depression occurs when the GDP declines by more than 10% and continues to do so, lasting for more than 3 years. There are certain factors which can be observed during a depression alone. Conditions such as price deflation, financial crises and bank failures are not typically seen under recession conditions whereas these factors are seen specifically in a depression state alone.
However, a recession and a depression will coincide constantly due to the fact that it is normally after a period of recession that a depression occurs and also because the difference between these two terms depend upon the severity of the fall of the economic activity. Thereby, while a depression is always a recession, a recession cannot always be termed as a depression. This may be due to the fact that recession is a more frequently occurring phenomenon while the occurrence of a depression is not that commonly seen.