Recession vs. Depression: Definitions and Differentiation

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  • 0:05 Challenging Economic Times
  • 2:18 Defining Recessions…
  • 4:04 The Great Recession…
  • 6:22 Lesson Summary
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Lesson Transcript
Instructor: Jon Nash

Jon has taught Economics and Finance and has an MBA in Finance

Discover the real differences between recession and depression, including how economists actually define the two terms and when they have happened in the past.

Challenging Economic Times

Americans in soup lines during the Great Depression
Great Depression Photos

During the Great Depression, real economic output in the United States fell nearly 30%. Real per capita disposable income sank nearly 40%. More than 12 million people were thrown out of work, and from 1929 to 1933, the unemployment rate rose from around 3% to nearly 25%. Many people who had a job were only working part-time.

I don't know about you, but whenever I hear the word 'depression', I think of old black-and-white photos depicting nicely-dressed men and their families standing in food lines at the soup kitchen.

Thankfully, times like this have been very rare. People often throw around phrases like 'depression' and 'recession', but what is the difference between a recession and a depression? Let's look at both of them and find out.

In the town of Ceelo, things have been rough lately. People have stopped spending a lot of money and are trying to find ways to cut their budget. In order to try and preserve their profits, companies are laying off employees.

Bob's lawn business has lost customers, and he's had to lay people off. Margie's cake business has seen sales decline because - I know it's hard to believe - people are buying fewer cakes. (If they only knew how good the chocolate cake is...) Anyway, Margie has had to let employees go as well. Companies all over Ceelo are feeling the effects because sales are down, and economic output has been falling for the last six months.

Let's suppose that roughly 8% of the labor force don't have jobs right now. This scenario isn't very uncommon. In fact, it may even happen every 3-6 years or so. This is what economists would call a recession.

Now imagine that things have been rough in Ceelo for two years in a row. The economy has been struggling so much that one out of every five people don't have a job, and economic output has gone down by 12% over the last two years. Ouch! Most economists would call this a depression.

Defining Recessions and Depressions

Job losses during the Great Depression and Great Recession
Great Recession Unemployment Graph

A recession is the contraction phase of the business cycle. It begins after the economy reaches a peak of activity and ends as the economy reaches its trough. The National Bureau of Economic Research (NBER) describes it this way:

'A recession is a period of decline in total output, income, employment and trade, usually lasting six months to a year and marked by widespread contractions in many sectors of the economy.'

A common rule of thumb for recessions is two quarters of negative GDP growth.

On the other hand, a depression is a prolonged period of economic recession marked by a significant decline in income and employment. Depressions are caused by the same factors that lead to a recession. Notice I used the words 'significant decline' and didn't give an amount of time. That's because the National Bureau of Economic Research decides when recessions occur, but there is no widely accepted definition of depressions. A common rule of thumb that some people use is a 10% decline in economic output as measured by the gross domestic product (GDP).

Here's something you probably didn't know. Believe it or not, before the Great Depression, all economic downturns were called depressions. After the Great Depression, the phrase 'recession' was used to describe downturns so that people wouldn't remember the terrible time that they had during the Great Depression.

The Great Recession vs. The Great Depression

There hasn't been a decline large enough to call it a 'depression' since the Great Depression. However, the recession that began in 2007 has been called 'The Great Recession' because unemployment was high for a long time, and the recession lasted for 18 months.

The stock market declined over 50% during the Great Recession
Great Recession Stock Market Graph

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