In economics, a depression is a sustained, long downturn in one or more economies. It is more severe than a recession, which is seen as a normal downturn in the business cycle.
Considered a rare but extreme form of recession, a depression is characterized by abnormal increases in unemployment, restriction of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. Price deflation or hyperinflation are also common elements of a depression.
Definition
There is no widely-agreed-upon definition for a depression, though some have been proposed. In the United States the National Bureau of Economic Research determines contractions and expansions in the business cycle, but does not declare depressions.
A proposed definition for depression is a sustained recessionary period in which the population is forced to dispose of tangible assets to fund every day living, as was seen in the US and in Germany in the 1930s.
Often, in Canada and the United States, the word "depression" is used interchangeably with "recession", often to simply indicate a deeper or more serious recession. Some economists require a fall in GDP of 10 per cent or more before a recession would be referred to as a depression.
Characteristics
Generally, periods labeled depressions are marked by a substantial and sustained shortfall of the ability to purchase goods relative to the amount that could be produced using current resources and technology (potential output).
Though there is no widely accepted definition for an economic depression, according to an article in The Economist, there are two rules of thumb found widely on the internet. One is a decline in real GDP exceeding 10%, and the other is a recession lasting 3 or more years.
