Business, Legal & Accounting Glossary
A depression refers to a prolonged recession, characterized by factors such as declining business activity, unemployment, and rising inventories.
GDP equals the total market value of the annual output of final goods and services, which are produced within a country’s boundary. The gross domestic product includes the domestic output of firms of foreign origin and excludes foreign output of firms of domestic origin. Economists often use per capita GDP for measuring the standard of living. Standard of living is an indicator of a nation’s financial health. It measures the level of material comfort available to a nation by measuring the availability of a typical consumption basket of goods and services
Phases of growth and contraction are part of business cycles. When a country enters a phase of recession its economy experiences negative growth. The real income of economic agents decline, the level of unemployment rises and industrial production also falls. In case a recession hangs on for a long time it turns into an economic depression.
During a depression, investments are more strongly affected than consumption.
In economics, a severe and prolonged recession is sometimes called a depression. Unlike a recession, no standard definition of a depression exists. (A recession is often defined as two consecutive quarters of declining GDP, though the NBER is the official arbiter of what constitutes a recession.) Like a recession, a depression is characterized by increased unemployment, reduced output and investment, and tightening credit. Price deflation and an increased number of bankruptcies are also manifestations of a depression. What ultimately causes and sustains a depression is subject to debate. Most economists agree that a recession is a normal part of the business cycle, yet the severe downturn (i.e. depression) is abnormal. One theory is that a recession can be exacerbated into a depression by policy errors. Policy errors can either create conditions that set up the economy for a fall in output or simply hinder recovery. The Great Depression that affected most of the world beginning in 1929 is the archetype.
The Great Depression refers to a phase of economic depression, which began in 1929 as an aftermath of the US stock market crash. The Great Depression engulfed the entire world and lasted for close to a decade. It was associated with widespread poverty, unemployment, hunger and political unrest. Some economists attribute The Great Depression to the fallout of hardcore capitalism without any governmental corrective actions.
The global economy was on the verge of a recession with the ‘dot com bubble’ burst in 2000. This situation worsened with terrorist attacks on September 11, 2001. To lift sagging economies, central banks world over reduced interest rates. Capital liquidity was enhanced. Investors in turn engaged in risky investment projects. Finances in the form of subprime mortgage loans were available to borrowers who had poor credit ratings. Consumer demand fueled the housing bubble, which ultimately burst in August 2006. This eventually led to a prolonged and severe economic downslide. Ultimately it led to a global economic slowdown in 2007.
The Great Depression was the worst financial event in US history.
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This glossary post was last updated: 29th March, 2020