Recession vs. Depression

Recession Defined

A recession is a decline in economic activities in a certain country or region. This can be measured by employment, income, production, and spending factors. 

This happens when there is a decline in the business cycle normally marked by a downturn in work and output, combined with  a fall in income and spending.

Normally, businesses delay investment during a recession. A recession is considered an unfavourable event because it can increase homelessness, poverty, and unemployment.

A recession usually lasts from about 2 to 10 months. An average recession period spans for about 10 months on average.

The worst recession ever recorded is known as ‘The Great Recession’. 

• This was a time of general downturn observed in the national economy all over the world.
• The magnitude and timing of the recession different from one country to another.

Currently, Japan and the UK find themselves in recession. They are joined by Finland and Ireland as two negative quarters of Gross Domestic Product (GDP) were reported. This meets the widely accepted definition of recession.

Depression Explained

Simply explained, a depression is considered worse than a recession.

• It is a severe economic decline that can persist for years. 
   
• There is usually a great increase in unemployment, and there is a significant reduction in incomes and spending. 
  Businesses close during a depression. 
   
• Investment slows down a serious downturn in construction projects, accompanied by notable reductions in international trade and capital movements. 

Unlike recession, which is usually limited to a region or country, depression is usually global. 

• It usually lasts for multiple years, and there is no limit to how long it can last.
• The most recent depression which is known as "The Great Depression" lasted roughly for 10 years.
• That global depression lasted from 1929 to 1939, and was caused by a lot of factors such as the crash of the stock market in 1929, and the worldwide financial crisis.

At that time, the rate of unemployment increased by 24.9% in the US, a lot of people lost their jobs, experienced wage reduction, and increased poverty rate. 

• The effect of the Great Depression was devastating on the economy of the world.
• A lot of countries experienced a decline in their GDP.
• The GDP of some countries went down by more than 30%.

Some countries in economic depression are DR Congo and Chad.

Are there any similarities between Recession and Depression?

The line between both is thin - but these would be the similarities between the two:

1. Both are accompanied by huge economic slumps.
2. They are both caused by market failure.

Differences

When does a recession turn into depression?

A recession becomes a depression when it lasts for more than 3 years and when there is a decline of nothing less than 10% in annual GDP. 

How Do Countries Battle Them? 

1. Expansionary fiscal policy
This involves reducing taxes, increasing government spending, or a mixture of both. When the government reduces the tax, it gives consumers disposable earnings and this makes them willing to spend. 

2. Expansionary monetary policy
This involves cutting down the rates of interest to encourage investments and borrowing. When the interest rates are reduced, people enjoy value for their money and will be more willing to spend their money.

3. Financial stability
Financial stability will involve the government guaranteeing bank deposits, and this will in turn improve the credibility of banks.

Conclusion
An important truth you should know is recessions happen to every economy in the world. It is part of an economic cycle.

There are various seasons where an economy witnesses an economic expansion thanks to favourable activities happening within the economy. At other times, an economy can experience seasons of contraction where there are reduced financial activities within the economy.

Depression is a recession that comes with extreme economic consequences, and this economic downturn can last for years.

These events are events that can have huge outcomes on businesses and the economy of the country. So knowing how to handle situations like this is essential to managing businesses and the economy.

By understanding the events and being proactive, you can reduce the negative impact of depression or recession.