great question. Unfortunately, there isn’t a conventional answer, although over there is a renowned joke economists like come tell concerning the difference in between the two. But, let’s come back to that later.
Let’s start by defining a recession. As I mentioned, there room several frequently used meanings of a recession. Because that example, journalists often explain a recession as 2 consecutive soldier of declines in quarterly genuine (inflation adjusted) gross residential product (GDP).
The meaning used by financial experts differs. Economists use monthly service cycle peaks and troughs designated by the nationwide Bureau of financial Research (NBER) to define periods of expansion and contractions. The NBER website list the peaks and troughs in economic activity starting with the December 1854 trough. The website likewise defines a recession as:
A recession is a significant decrease in economic activity spread across the economy, lasting more than a couple of months, typically visible in genuine GDP, real income, employment, commercial production, and wholesale-retail sales. A recession starts just after the economic climate reaches a top of task and ends together the economic situation reaches the trough. Between trough and also peak, the economy is in one expansion. Growth is the normal state of the economy; many recessions are brief and also they have been rare in current decades.
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While over there is also no standard an interpretation for depression, it is commonly characterized as a much more severe variation of a recession. In his famous intermediate macroeconomics textbook, Gregory Mankiw (Mankiw 2003) distinguishes in between the two:
There are repeated periods throughout which actual GDP falls, the many dramatic instance being the early on 1930s. Such durations are called recessions if they are mild and also depressions if they are more severe.
As Mankiw sharp out, possibly the most famous economic downturn in the U.S.’s (as well together the world’s) economic background was the great Depression, often defined as beginning in 1929 and lasting at the very least through the 1930s and into the early 1940s, a period that actually has two severe financial downturns. Using the NBER service cycle dates, the an initial downturn the the good Depression began in august 1929 and lasted 43 months, until March 1933, much longer than any kind of other twentieth century contraction. The economy then expanded for 21 months, native March 1933 until might 1937, prior to suffering another downturn: from may 1937 until June 1938, a period of 13 months, the economic climate again contracted.
Degree the Severity
One quick method to illustrate the difference in between the severities of the economic contractions connected with recessions over the duration from 1930 to 2006 is to study the yearly growth prices of genuine GDP (in chained year 2000 dollars). Graph 1 mirrors the yearly growth or contraction in the economy. The gray bars stand for recessions identified by the NBER. The two many severe contractions in calculation (excluding the post-World war II adjustment native 1945 to 1947) emerged during the an excellent Depression that the 1930s.
Chart 1: yearly growth price of actual GDP (%)
In a in march 2, 2004, speech at Washington and also Lee University, then Governor, and also now Fed Chairman, Ben Bernanke, contrasted the severity that the early stage downturn throughout the an excellent Depression and the many severe post-World battle II recession the 1973-1975. The differences are telling:
During the major contraction step of the Depression, in between 1929 and also 1933, real output in the United states fell nearly 30 percent. Throughout the very same period, follow to retreat studies, the unemployment price rose from about 3 percent to nearly 25 percent, and also many of those lucky enough to have a task were able to work only part-time. Because that comparison, in between 1973 and 1975, in what was maybe the many severe U.S. Recession of the civilization War II era, actual output fell 3.4 percent and the unemployment price rose from around 4 percent to about 9 percent. Other functions of the 1929-33 decline included a sharp deflation—prices fell at a price of virtually 10 percent per year during the early on 1930s—as well as a plummeting stock market, widespread bank failures, and a rashes of defaults and bankruptcies by businesses and also households. The economy improved ~ Franklin D. Roosevelt"s inauguration in march 1933, but unemployment stayed in the double digits because that the rest of the decade, full recovery showing up only with the advent of human being War II. Moreover, together I will talk about later, the Depression was worldwide in scope, affecting most countries about the human being not only the unified States.
While you deserve to see from the above discussion the recessions and depressions are major business, some economic experts have been recognized to imply that there is another more casual way to explain the difference between a recession and also a depression (recall that I began this answer with a promise that a joke):
When your neighbor loses your job, it’s a recession. Once you lose your job, that’s a depression!
Ask Dr. Econ. May 2002. “What are business cycles and also how perform they influence the economy?” commonwealth Reserve financial institution of mountain Francisco website.
Bernanke, Ben S. 2004. “Money, Gold, and also the good Depression” plank of Governors the the federal Reserve System, Washington, DC. March 2, 2004.
Greenwald, Douglas, Editor in Chief. The McGraw-Hill Encyclopedia of Economics. McGraw-Hill, Inc., brand-new York, 2nd Edition. See business Cycles, pages 96-104, by Geoffrey H. Moore.
Mankiw, N. Gregory. 2003. Macroeconomics.
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precious Publishers, new York, 5th Edition. View Chapter 1. Web page 4.