Recession & Depression

Now days, these words have become common in papers & business TV channels. Almost everybody who read the papers & watch business channels will be aware of the happenings around the world, what was the cause of RECESSION in certain countries like US, UK, European Union, Japan & etc. Now today’s my topic of posting is giving some brief idea about

Ø What is recession?

Ø What is depression?

Ø What are the differences between these two?

When I read an article from the economist.com I got this information. I thought it’s informative & educative. So according economist.com…

Recession is the contraction in the economy resulting in falling of GDP (Gross Domestic Product) for 2 consecutive quarters. And this is what other sites also say for the definition of recession.

Where as about the Depression there is no standard definition like recession. According to that article, the principal criteria for distinguishing a depression from a recession is a decline in real GDP that exceeds 10% or one that lasts more than 3 years. America’s Great Depression qualifies on both counts, with GDP falling by around 30% between 1929 and 1933.

A recent analysis by Saul Eslake, chief economist at ANZ bank, concludes that the difference between a recession and a depression is more than simply one of size or duration. The cause of the downturn also matters. A standard recession usually follows a period of tight monetary policy, but a depression is the result of a bursting asset and credit bubble, a contraction in credit, and a decline in the general price level. In the Great Depression average prices in America fell by one-quarter, and nominal GDP ended up shrinking by almost half.

Another important implication of this distinction between a recession and a depression is that they call for different policy responses. A recession triggered by tight monetary policy can be cured by lower interest rates, but fiscal policy tends to be less effective because of the lags involved. By contrast, in a depression caused by falling asset prices, a credit crunch and deflation, conventional monetary policy is much less potent than fiscal policy.