A negative change in economic prospects impacts many aspects of life. Consequences such as high rates of unemployment, reduced investments, reduced economic activities, and falling incomes are some of the indicators of a poor economy. In the past, economic activities have been disrupted, and the consequences were felt worldwide. A constant decline in economic growth can cause an economic recession or depression as seen in the Great Recession and the Great Depression. Although these two terms relate to a drop in economic performance, they are different in several ways.
What is the Great Recession?
This was a drastic decline in global economic activities in the late 2000s and early 2010. Although the timing and scale of the recession varied in different countries, it was rated as the second-worst economic downturn according to The International Monetary Fund. The Great Recession was caused by the bursting of the housing bubble in the United States in 2005. This was as a result of a drop in the price of houses which favored homeowners as they were able to finish payments. As a result, the value of mortgage-backed securities dropped in 2007-2008 causing some banks to collapse. This led to less borrowing and less spending.
Although the Great Recession was not felt equally in the world, developed countries, including South America, North America, and Europe were most affected while less developed countries including India, China and Poland were less affected, and experienced growth during this period. The affected countries suffered rising unemployment, slow international trade, and high commodity prices. In response to the great recession, the United States of America set up monetary policies of the Federal Reserve, such as lower interest rates of almost zero promoted liquidity. This was one of the factors that were credited at the end of the Great Recession.
What is the Great Depression?
This was a severe economic downfall that took place in the 1930s. The Great Depression began in the United States of America, and spread throughout the world, though varied effects were felt. It has been rated as the deepest, longest and the worst depression ever felt. It was caused by a major fall in stock prices in 1929 and became worldwide after the stock market crashed. While some countries took a period of 6 months to one year to recover, others recovered with the onset of World War 11.
In most countries, the fall in stock prices caused distress selling followed by less money supply. The asset prices then dropped which led to a fall in business’ net worth. The economy then lost confidence and as a result, people started hoarding money. This ultimately led to a rise in interest rates and a fall in nominal interest rates. Major effects included the drop in profits, high rates of unemployment, low personal income, and the close of essential industries such as construction.
Similarities between the Great Recession and the Great Depression
- Both caused economic distress
Differences between the Great Recession and the Great Depression
Definition
The Great Recession refers the drastic decline in global economic activities in the late 2000s and early 2010. On the other hand, the Great Depression refers to a severe economic downfall that took place in the 1930s.
Period
While the Great Recession occurred in the late 2000s and early 2010, the Great Depression occurred in the 1930s.
Cause
The Great Recession was caused by the bursting of the housing bubble in the United States in 2005. This was as a result of a drop in the price of houses which favored homeowners as they were able to finish payments. As a result, the value of mortgage-backed securities dropped in 2007-2008 causing some banks to collapse. This led to less borrowing and less spending. On the other hand, the Great Depression was caused by a major fall in the stock prices in 1929 and became worldwide after the stock market crashed.
The Great recession vs. the Great depression: Comparison Table
Summary of The Great Recession vs. The Great Depression
The Great Recession refers to the drastic decline in global economic activities in the late 2000s and early 2010. It was caused by the bursting of the housing bubble in the United States in 2005. This was as a result of a drop in the price of houses which favored homeowners as they were able to finish payments. As a result, the value of mortgage-backed securities dropped in 2007-2008 causing some banks to collapse. This led to less borrowing and less spending. On the other hand, the Great Depression refers to a severe economic downfall that took place in the 1930s. It was caused by a major fall in stock prices in 1929 and became worldwide after the stock market crashed. Both caused economic distress.