20+ Differences Between Recession And Depression (Explained)

by

The most common confusion people have is between recession and depression. Although recession and depression both indicate a downturn in the economy, they differ from each other on multiple grounds. Depression is more serious and dangerous for the economy.

Here is a detailed discussion to help you discern the differences between these two important terms. Keep reading to find out how recession and depression differ from each other.

I/C

Recession VS Depression

Recession

  1. A short-term economic decline is known as a recession.
  2. The economy remains in recession for more than a few months.
  3. It is more frequent.

Depression

  1. It is defined as a severe and prolonged fall in economic activity.
  2. The economy remains in recession for several years.
  3. It is a rare situation.

Comparison Between Recession And Depression

Parameters RecessionDepression
Time SpanThe recession generally persists for some months.Depression lasts for an extended period.
FrequencyA recession occurs frequently.An economic depression is a rare situation.
EffectsA recession has less serious effects.The effects of depression are extreme.
RecoveryRecovery of the economy is easier. Recovery of the economy is arduous.
ExampleThe Great Recession of 2008.The Great Depression of the 1930s.

Definitions Of Recession And Depression

What Is A Recession?

When economic activity diminishes in a particular region and this decline persists for over a few months, it is referred to as recession. Indicators such as real GDP, employment, and real income signify recession.

Commonly, it is believed that a recession occurs when economic growth becomes negative and remains so for two consecutive quarters. But the National Bureau of Economic Research does not define recession along these lines anymore.

What Is Depression?

As mentioned earlier, depression is a more serious and profound version of recession. It occurs when the downturn in the economy or recession persists for an extended period, that is, for three or more years. 

The United States suffered a severe economic downswing for almost a decade. Known as the Great Depression, it is the prime example of economic depression in the United States.

Significant Differences Between Recession And Depression

Time Span

  • Recession- A recession is an economic condition characterized by diminishing economic activity that persists for several months. Thus, the recession is a short-term decline. 
  • Depression- When an economic downturn persists for an extended period, it is called depression. The Great Depression is a major depression in the history of the world in general and the US in particular. It began in 1929 and lasted till the late 1930s.

Causes

  • Recession- The factors that generally trigger a recession include economic shocks, geopolitical crises, issues in the financial market, deflation, low consumer confidence, high-interest rates, and bursting of asset bubbles.
  • Depression- It is difficult to identify a single reason behind the occurrence of depression. Instead, it is usually a result of numerous negative reasons.

For instance, in the debates among economists regarding the causes of the Great Depression, there is a consensus that the stock market crash played a crucial role. 

However, it was not the ultimate cause of the Great Depression. Other factors like debatable monetary policies and the failure of banks exacerbated the situation.

Effects

  • Recession- Recession leads to higher unemployment levels, thus increasing the risks of layoffs and benefit reduction for the already employed people. 

For businesses, the recession is a period of a considerable drop in sales. Recession can also cause an increase in the bankruptcy of firms.

  • Depression- A depression is usually characterized by a 10 percent reduction in GDP level. The effects of depression are more dangerous and extreme compared to those of recession. It leads to unbelievable levels of unemployment and scores of bankruptcies. 

It can be understood by looking back at the Great Depression, which witnessed escalating unemployment levels and numerous bank failures. The ordinary people were the worst hit. 

Global Impact

  • Recession- When a country is experiencing a recession, its economy has a significant impact. Other countries can also experience its effects.
  • Depression- Economic depression always has cascading effects on the economy of other nations. For instance, during the Great Depression, it is said that almost every country experienced some level of decline. 

I/C

The contrast between the Recession and the Depression

Recession

  1. Its severity is less.
  2. It has short-term consequences.
  3. The economy’s recovery is more manageable after a recession.
  4. It can have some effect on other economies.

Depression

  1. Its severity is more.
  2. The consequences are generally long-term.
  3. It is challenging for the economy to recover after a depression.
  4. Economic depression has negative consequences for other nations. 

Examples

  • Recession- Since the end of the Great Depression, the US economy has undergone a recession 14 times. The Great Recession that occurred from 2007 to 2009 was a serious crisis caused by the disruption of the subprime mortgage market and other problems in the financial market.
  • Depression- Initiated by the stock market collapse, the Great Depression is considered the most critical economic depression the US has ever experienced. It was a worldwide crisis marked by severe human misery. 

I/C

Great Recession VS Great Depression

Great Recession

  1. The Great Recession occurred from December 2007 to June 2009.
  2. It persisted for 18 months.
  3. There was a considerable fall in economic activities.
  4. The primary cause that triggered the recession was the crumbling of the subprime mortgage market.

Great Depression

  1. The Great Depression occurred from 1929 to the late 1930s.
  2. Its effects lasted for almost a decade.
  3. There was a serious economic downswing.
  4. The primary cause was the collapse of the stock market.

(FAQs) Frequently Asked Questions

1. What were the causes of the Great Depression?

According to economists, the Great Depression began with the stock market crash.

The condition was worsened by numerous other factors like the collapse of banks, unfavorable monetary policies, and failure in international trade.

2. Who were the hardest hit by the Great Depression?

Like any other crisis, the Great Depression impacted society’s marginalized and disadvantaged sections. These included the aged, children, and oppressed sections like African-Americans.

3. How long do recessions last?

Recessions generally persist for 6-12 months. However, they can be slightly shorter or longer.

For example, while the Great Recession lasted 18 months, the recession caused by covid-19 lasted only two months.

4. How does the recession affect an average person?

An average person is affected by high unemployment levels during a recession. As a result, there are increased chances of layoffs and benefit cuts.

5. Can a recession turn into depression?

When a recession lasts for a considerable period (three or more years) and causes a 10 percent contraction in GDP, it can give rise to depression. It depends on how severe the consequences are and how long they last.

Similar Posts:

Was this article helpful?

Leave a Comment