What is the difference between a recession and a depression?


What is the difference between a recession and a depression?

In: Economics

A recession is the contraction phase of the business cycle. A common rule of thumb for recessions is two quarters of negative GDP growth. A depression is a prolonged period of economic recession marked by a significant decline in income and employment.

The value of an economy can be summarised as Gross Domestic Product, which is the total value of all the stuff people have made or work they’ve done across a given time. The GDP of the United States is currently about $19 trillion a year, the European Union’s is about $18 trillion, and Australia’s is about $1.3 trillion.

Normally people are pretty good at increasing the value of everything they make and do so GDP normally increases a little bit every year.

Every now and again something might happen which causes GDP to stop increasing. A recession is when GDP actually starts going down. Right now it’s because the viral outbreak has stopped people going to work or being able to go out and spend money. Back in 2008 it was because the housing market in the US collapsed.

A depression is really just an extremely long and severe recession. The 2008 recession lasted about eighteen months and saw GDP in the US drop about 5.1%, compared to the Great Depression which lasted about a decade and saw GDP in the US drop by about 30%.

Recessions are pretty normal, and a big one typically happens about every ten years. Despite being uncomfortable to deal with in the short term can serve as valuable corrections if GDP is growing too quickly because people are making too much stuff.