Economics is the science that deals with the production, distribution, and consumption of goods and services that a society produces. It affects all walks of life, be it social, political, or financial. Growth of the economy is very important, as it is the pillar of any country.
For healthy growth, the businesses in the country must earn profit. The rate of employment should be high and the country has to be strong on forex reserves. However, growth can't be unbridled. The economy also goes through a cycle of 'peaks' and 'troughs' that constitutes the 'Economic Cycle' or the 'Business Cycle'.
Definition of Economic Recession
Some experts of the markets define economic recession as 'decline in the GDP (Gross Domestic Product) for two or more consecutive quarters'. The GDP of a country is measured on the basis of goods and services produced by a country.
Since this leaves out other important factors like the employment rate and consumer confidence, most economists do not like to define recession solely on the basis of GDP. The National Bureau of Economic Research (NEBR) is an agency with the authority to declare recession in the US.
The NEBR defines recession as 'significant decline in the economic activity of the country that lasts for more than a few months'. Since this includes a number of variables that are all part of a system, the official word from the NEBR usually comes well after the economy has already entered such a phase.
Definition of Economic Depression
Unlike recession, no definition for economic depression has been provided, either by NEBR, or by any economist. However, this term is understood as a severe downturn in the economy of a country that lasts for a year or more. GDP is a good indicator of whether we are in recession or depression.
If the decline in GDP is greater than 10%, an economy is said to be going through depression. Besides reduction in GDP, an this phase is characterized by an increase in unemployment rates and decrease in the flow of money into the economy.
Businesses find it exceedingly difficult to earn profits. As a result they reduce their staff that leads to unemployment. An overall crisis in industry and commerce is felt and defaults in loan repayment and bankruptcies commonly occur during an economic depression.
Difference between Recession and Depression
As both the terms refer to a slump in the economy, they have often been used interchangeably. However, it should be understood that both are different mainly in terms of their severity.
While a downturn in the economy for two consecutive quarters can be classified as a recession, a depression is marked by a more serious and prolonged slump during which the decrease in GDP is 10 % or higher.
Hence, even though a country might have more than two consecutive quarters of recession, it can't be said to have entered depression unless the decline in the GDP in all the quarters add up to at least 10%.
The economies of countries are fragile. They are bound to go through a number of minor fluctuations. Hence recessions occur more frequently than depressions. For example, the last real depression that the US economy has faced was the Great Depression of the 1930s. However, it has experienced more frequent recessions.
Since recessions are not as severe, countries can easily bounce out of periods of negative growth than when they are going through an economic depression. This is specially true for countries with diverse economies as they have other means of earning revenue when certain sectors of the economy experience a slump.
Such downturns are an inevitable part of any economy. Although they spell difficult times, such dips in economy also encourage businesses to formulate innovative ideas.
Job openings in new sectors are created, as certain businesses unable to prosper in normal periods of growth may find new opportunities. A little bit of alertness and wise investment can act as a buffer against the ill-effects of an economic slump.