Tuesday, June 12, 2012

What's the difference between a Recession and Depression?

In my last post, I explained that a business cycle's contraction phrase could either implicate a recession or implicate a depression. Today, I would like to explain the general differences between the two. [If anything I talk about doesn't make sense, refer back to my last post]

There are many definitions of a recession. Simply, the term implicates a market with a declining economy. Going back to my last post, I like to think of it as the part of the business cycle that follows the peak. However, different sources have defined it in other ways. For example, a 1975 New York Times article more specifically stated that a recession is a period of "two down consecutive quarters of GDP." In this definition, what follows a peak isn't necessarily a recession. Similarly, the Business Cycle Dating Committee of the National Bureau of Economic Research defines it as "a significant decline in economic activity spread across the economy, lasting more than a few months." .

As varied as the definition of a recession is, however, the definition of a depression is even more-so. Until economists can agree on a definition, let's say it occurs when there is a notable decline in GDP (10%) for over two consecutive quarters in two or more national economies. It's a vague definition, but you'll still find people who disagree with it.

Remember, recessions and depressions are both phases of declining growth in an economy. Recessions are most commonly defined as a period of "two down consecutive quarters of GDP," and Depressions are just more severe and globalized recessions (10% decline in GDP).

I know these definitions are vague (and I apologize), however there has been no organization who has had the ability to standardize the definition of a "recession" or "depression." I hope in the future this will be resolved and I can come back with a more clear post!


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