Difference Between Depression and Recession

Blame it upon recession or depression? Depression and recession are two words that we listen and read more often nowadays. Because of their frequent use, even a tea seller on the road now understands the implications of these two phenomenons that economy of a country sometimes faces. Whenever we have low industrial output, low sales, and low investments without any ostensible reason we know who to blame it for? Recessions and depressions are the bad boys in economy who are ready to take the blame whenever there is a lull in the market for a long time period. But do you think you have the answer regarding differences between these closely related economic phenomenons? Let us find out.

Even if one is a novice and doesn’t know anything about depression and recession, there is a good chance that he has heard about the hardships faced by his grandfather or father around 1930 during the great depression that shook the country, and when production figures hit their lowest ebb, and unemployment was at its peak. The difficulty in understanding the concepts stems from the fact, that there is no universally accepted definition of either depression or recession. However, GDP is a good indicator of these phenomenon, and some economists are of the view that if GDP continues to fall for 6 months, the economy can be said to be in the grip of a recession. Again, with no strict parameters to judge depression, depression is said to have taken over, if the fall in GDP is more than 10% ,and if it continues for more than 2-3 years. So, in general, the difference between recession and depression is one that of severity and duration. While depression is more sever and lasts longer, recession is lighter and lasts for much smaller time periods.

However, it would be wrong to look at just one indicator before declaring that the economy is in the throes of depression. You would be surprised to know that there are people and organizations that earn living by recording indicators that predict recession or depression. One such organization that sniffs symptoms of recession is National Bureau of Economic Research, and its opinion carries much weight when the onset or ending of the dreaded depression is to be announced. So even if we do not feel it, we are in the grip of a recession if NBER says so.

When industrial production falls, unemployment goes up, and people are less willing to part with their money in the form of investments, one can assume that recession has struck economy. There is less money to go around and consumers are not in a mood to overspend. If these things happen for more than two quarters, recession is said to have struck the economy. If the situation persists for more than a year and the GDP falls for more than 10%, depression is said to have set in.

Recessions are more frequent than depressions, and economies are resilient to sustain the impact of such recessions. Economic recovery takes place on its own or through change in economic policies as central banks devise ways to make an economy come out of a recession.

Politicians use these words to further their interests. To criticize an economic policy, a politician may cite recession as much more severe than it is and equate it with depression and vice versa.