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Difference Between Recession and Depression

Any change in the economy causes it to either expand or contract. Recession and depression both describe periods of economic decline, but they are not interchangeable. Both terms are often used in the context of macroeconomics but their impact can vary across different industries and regions.

In this article, we’ll look at some fundamental differences between recession and depression.

What is a recession?

A recession is like a decline in economic activity across the economy that lasts for a while. A lot of things decrease during this time, such as gross domestic product (GDP), employment, investment spending, and consumer spending. Recessions can vary in duration.

Recessions can be short like a few months or longer. People might lose jobs when a recession hits and unemployment rates go up. Companies might cut back on workers to save money or put big projects on hold to save money. Governments often step in and try to fix things by making policies that boost growth.

What is depression?

Depression is like a long-lasting version of a recession. It goes beyond the characteristics of a recession and represents a period of economic downturn that stays for a really long time. Unemployment rates during a depression are significantly higher than in a recession.

Depression can be triggered by many factors, such as financial crises, bubbles in the stock market or real estate, or major global issues like wars or pandemics. 

Governments typically respond to depressions with comprehensive and coordinated policy measures. They might put in huge amounts of money, change how money works, and make big changes to the financial system to try and get the economy back on track.

Difference between Recession and Depression

Duration and Severity

Typically, a recession is a short- to medium-term economic downturn lasting a few months to a couple of years. It involves a decline in economic activity but is generally less severe than depression.

A depression is a prolonged and severe economic downturn that lasts for a really long time. It goes beyond the typical duration of a recession and involves a deeper and more enduring contraction in economic activity.

Unemployment

Unemployment rates may rise during a recession, but the increase is generally moderate and may be temporary. Job losses are a concern, but the labor market usually begins to recover as the economy improves.

Unemployment rates in a depression are significantly higher and persistently elevated. Job losses are widespread, and many individuals may struggle to find employment for an extended period.

Financial Stability

While recessions may lead to financial challenges, they typically do not result in widespread banking crises. Financial institutions may face stress, but the banking system remains relatively stable.

Depressions often involve severe financial crises, including widespread bank failures. Confidence in the financial system is severely undermined, and accessing credit becomes challenging for businesses and individuals.

Policy Response

Governments and central banks respond to recessions with measures such as monetary policy adjustments (interest rate cuts) and fiscal stimulus packages. These actions aim to mitigate the impact and stimulate economic recovery.

During a depression, governments typically implement more comprehensive and drastic measures like major money injections, financial sector reforms, and other bold moves to restore the economy.

Example

The Great Recession (2007-2009) is a notable example of a recession that had a global impact. It was triggered by the housing bubble burst in the U.S., leading to a financial crisis that had an impact worldwide.

The Great Depression (1929–1939) was one of the most severe economic downturns in modern history. It began with the infamous stock market crash of 1929, where the values of stocks on the New York Stock Exchange collapsed.

Recession vs. Depression: Comparison Chart

Summary

Both recessions and depressions involve economic contractions. Depressions, however, are distinguished by their extended duration, severe impact on unemployment, financial instability, and the need for more aggressive policy responses. Recessions are considered a normal part of the economic cycle, while depressions are rare and represent extreme economic conditions.

FAQs

Was 2008 a recession or a depression?

The economic downturn in 2008 is generally referred to as the Great Recession. While it was a severe global financial crisis, it did not meet the criteria for depression.

What happens during a depression?

A depression involves a deeper and more enduring contraction in economic activity. 

What happens if we go into a recession?

People start to lose jobs when a recession hits and unemployment rates go up. Companies typically cut back on workers and put big projects on hold to save money.

What not to buy during a recession?

During a recession, you should often reconsider your spending habits. You should avoid non-essential and luxury items, high-end electronics, and large-ticket purchases.

Are we in a recession in 2023?

We avoided a recession in 2023.

What would a Great Depression look like today?

A Great Depression today could have severe global consequences, with widespread unemployment, financial instability, and a significant impact on various industries. The interconnectedness of the global economy could amplify the effects, leading to a prolonged and challenging recovery.

How long do economic depressions last?

Economic depressions can last for several years, and the duration can vary depending on the factors causing the downturn and the effectiveness of policy responses. The Great Depression of the 1930s, for example, lasted approximately a decade.

How does an economy get out of a recession?

Governments and central banks implement measures to stabilize the economy during a recession. This may include major money injections, interest rate cuts, and policies to restore the economy to its normal state.

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8 Comments

  1. Thanks for the articles.

  2. AWESOME STUFF DUDE

  3. because of the summary its easy to understand….

  4. depression is sever and long lasting process while recession is frequently happening and is for a short period.
    depression effect the whole world while recession is concerned with a specific country.

  5. I have been curious about the difference and have been searching 3 sites, then I came across yours. Your definition is much better explained. Many thanks!!

  6. Very helpful article ..a big thank you

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References :


[0]Image credit: https://www.canva.com/photos/MAEEjiq_ARQ-recession/

[1]Image credit: https://www.canva.com/photos/MAFYRXRvfyI-depression/

[2]Crayton, Lisa A., and Jason Porterfield. Economic Depression: What It Is and How It Works. Enslow Publishing, LLC, 2015.

[3]Dent, Harry S. The Great Depression Ahead: How to Prosper in the Crash Following the Greatest Boom in History. Simon & Schuster, 2009.

[4]Tretina, Kat and Benjamin Curry. “Recession Vs Depression.” Forbes, 27 Sept. 2022, www.forbes.com/advisor/in/investing/recession-vs-depression/.

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