Differences Between a Recession and a Depression

My friend and I were having a discussion over what the correct term was for the economic downturn we are currently experiencing. The terms seem to be used interchangeably at times, but there is a difference. If you are wondering about the difference, read more to find out about the history of economic depressions.

The terms economic recession and economic depression are spread all over the news lately. But what do they mean exactly? There are two key differentiations between recession and depression, the length and severity of a decline in GDP. A recession is defined as a decline in Gross Domestic Product, the total market value of what consumers, investors and the government spends, plus the value of exports, minus the value of imports, for two or more consecutive quarters.

Knowing about the differences between a recession and a depression will give you a better understanding of the history of our country and the economic downturns we've faced before.

• Decline in Real GDP over 10%. A decline in Real GDP of over 10% is required for a depression. GDP stands for Gross Domestic Product, or the output of the country's manufacturing and services. As an example, the Great Depression had a decline in GDP of approximately 30% between 1929 and 1933. Output also fell by 13% during 1937 and 1938.
• Decline in Real GDP for Over Three Years. For a downturn to be labeled a depression, GDP needs to decline for over three years. The Great Depression lasted 43 months, which was not the longest in America's history. The longest at 65 months was between 1873 and 1879.
• Other Indicators. The cause of the downturn also matters. A recession often 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.

The term 'recession' is a relatively new term. It was coined after the 1930s, before this all economic downturns were called depressions. Economic downturns are milder today than before, they were historically much deeper and longer. They are not as severe today due to government spending. As the government increases spending, it helps stabilize the economy and support incomes. Also, historically when countries were on the gold standard, the money supply would slip during recessions, making the downturn more severe. Bank failures were also more common.