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Difference Between Financial Crisis and Economic Crisis

Economic activities in a country may be affected by various challenges. These have a negative impact on the stakeholders involved in the economic performance of a country. To explain this, two terms, financial crisis, and economic crisis are used to explain the adverse status of a country. Although they both refer to economic challenges in a country, they have various differences in terms of causes and the impact on an economy.

 

What is Financial Crisis?

This is a situation whereby the financial assets’ values fall rapidly in an economy. Due to this, assets decline in value, consumers are unable to pay their debts and financial institutions are faced with liquidity shortages, causing economic instability. This leads to interruptions in an economy through;

  • Financial intermediary activities through banks and other financial institutions
  • Changes in volumes of asset prices and national credit
  • Government intervention on the recapitalization
  • Liquidity efforts from all parties

The key determinants for a financial crisis in an economy include banks and other financial institutions. These cause financial disruptions after a panic resulting in investors selling off assets or withdrawing savings. Other situations that may result in a financial crisis in an economy include a stock market crash, currency crisis, sovereign default and the bursting of a financial bubble, such as the real estate market. 

Although a financial crisis may be limited to financial institutions or an economic sector, it can spread throughout the economy, region, country or even worldwide.

An example of a recent financial crisis is the 2007-2008 global financial crisis, which was the worst since the stock market crash of 1929.

 

What is Economic Crisis?

This is a situation whereby a country experiences a sudden downturn due to a financial crisis. This results in drying up of liquidity, high rate of unemployment, low production levels, a falling GDP and economic fluctuations as a result of deflation or inflation. An economic crisis can be in the form of a depression or a recession.

An economic crisis can be caused by;

  • Huge scale mismanagement of scale
  • Mismatch of assets by financial institutions
  • The sudden decline of values of securities and stocks

An economic crisis has a negative impact on the general public, financial institutions and the entire economy. Increased unemployment rate negatively impacts the living conditions in an economy.

 

Similarities between Financial Crisis and Economic Crisis

  • Both cause instability in an economy

 

Differences between Financial Crisis and Economic Crisis

Definition

While a financial crisis is a situation whereby the financial assets’ values fall rapidly in an economy, an economic crisis is a situation whereby a country experiences a sudden downturn due to a financial crisis.

Effects

Financial crisis directly affects the financial and banking sectors. On the other hand, economic crisis directly affects all economic activities in an economy.

Contributing factors

The contributing factors to a financial crisis include uncontrolled and unexpected consumer behavior, regulatory and systemic failures as well as high-risk incentives. On the other hand, contributing factors to an economic crisis include high-interest rates, a decrease in consumer spending, high unemployment rate and a financial crisis.

Economic effect

While a financial crisis is a sub-selection of an economic crisis, an economic crisis gives a clear picture of economic performance.

Financial crisis vs. Economic crisis: Comparison Table

 

Summary of Financial Crisis vs. Economic Crisis

Both financial and economic crisis are terms used in reference to poor economic conditions. However, a financial crisis is a situation whereby the financial assets’ values fall rapidly in an economy and directly affects the financial and banking sectors. On the other hand, an economic crisis is a situation whereby a country experiences a sudden down-turn due to a financial crisis and directly affects all economic activities in an economy. An economic crisis, however, impacts all economic players in the long run and gives a clear picture of economic performance.

 

Tabitha Njogu

Tabitha graduated from Jomo Kenyatta University of Agriculture and Technology with a Bachelor’s Degree in Commerce, whereby she specialized in Finance. She has had the pleasure of working with various organizations and garnered expertise in business management, business administration, accounting, finance operations, and digital marketing.

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References :


[0]Kose A & Claessens S. Financial Crises Explanations, Types, and Implications. International Monetary Fund, 2013. https://books.google.co.ke/books?id=8PS23X650CsC&printsec=frontcover&dq=Difference+between+Financial+Crisis+and+Economic+Crisis&hl=en&sa=X&ved=0ahUKEwjB-bHa4eXiAhV1SBUIHbRfCgAQ6AEIKzAB#v=onepage&q=Difference%20between%20Financial%20Crisis%20and%20Economic%20Crisis&f=false

[1]Valencia F & Claessens S. Financial Crises: Causes, Consequences, and Policy Responses. International Monetary Fund, 2014. https://books.google.co.ke/books?id=DBnnAgAAQBAJ&printsec=frontcover&dq=Difference+between+Financial+Crisis+and+Economic+Crisis&hl=en&sa=X&ved=0ahUKEwjB-bHa4eXiAhV1SBUIHbRfCgAQ6AEIMjAC#v=onepage&q=Difference%20between%20Financial%20Crisis%20and%20Economic%20Crisis&f=false

[2]The Global Economic Crisis: Systemic Failures and Multilateral Remedies. United Nations Publications, 2009. https://books.google.co.ke/books?id=2UWjV6piFOAC&printsec=frontcover&dq=Difference+between+Financial+Crisis+and+Economic+Crisis&hl=en&sa=X&ved=0ahUKEwjB-bHa4eXiAhV1SBUIHbRfCgAQ6AEIOjAD#v=onepage&q=Difference%20between%20Financial%20Crisis%20and%20Economic%20Crisis&f=false

[3]Image credit: https://www.publicdomainpictures.net/en/view-image.php?image=2023&picture=economic-downturn

[4]Image credit: https://pixabay.com/de/illustrations/finanzkrise-b%C3%B6rse-tendenz-symbol-544944/

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