A depression is a phase of the classical cycle of economic activity maintained for a long time and accompanied by a significant contraction in real gross domestic product (GDP). In other words, it is a state during which almost all economic and production indicators of the country are declining for a long period. However, this term should be distinguished from recession, which is a moderate decline in production or a slowdown in economic growth, but not a sharp fall.
What is a Depression
A recession is considered as a normal component of the business cycle. A clear marker of this is when one quarter of negative GDP growth is followed by another negative quarter. When GDP falls by more than 10% per year, it is a clear indication of a depression in the economy, which is less common than the recession process but, nevertheless, takes place in the history.
The state of depression is characterized by a strong decline in consumer confidence as well as a lack of investment in the economy, which leads to stopping normal economic processes.
A depression can last from several months to several years, and its duration is a point of contention for economists nowadays, who disagree about what can be considered the end of this economic process.
Indications of a Depression
As stated above, a depression is a type of recession. This is why the signs of a recession and depression are similar, but the difference between them lies only in the depth and duration of the recession.
There are some indications of a depression:
- rapidly rising unemployment;
- consecutive negative GDP growth;
- decreasing production and trade;
- decline in the standard of living of the population.
Regardless of the causes of the depression, it leads to a decrease in investment in the country's production. The population is getting poor. People prefer to buy only the cheapest and necessary products in the minimum quantity. The living standards, the minimum wages and the level of GDP per capita fall significantly.
The unemployment and discontent in a society grow, and it becomes a catalyst for strikes and rallies, as a result of which the level of trust in the authorities reduce. Due to the poverty of the population, small businesses slow down their development or disappear altogether. The economic position of the country on the world stage during the crisis worsens, and it loses its credibility.
History example of a Depression
The most famous example of a depression in the economy is the Great Depression, one of the main reasons for which was the doubtful monetary policy of the Federal Reserve (Fed). It was the worst economic downturn in the history of the industrialized world, the economic impact was felt worldwide for more than a decade.
The gold standard system was going through hard times due to the imbalance of gold reserves, but they still tried to maintain it, despite its viability. This reflected from the overproduction of goods and the shortage of money supply to purchase these goods. Since money was tied to gold, and the amount of this metal was limited, there was a deficit of money, and then a deficit of effective demand for goods and services. Further, as in a chain, there were a deflation, bankruptcies of enterprises, unemployment and a sharp drop in living standards. The interest rates continued to rise after the stock market crash in 1929 known as Black Thursday. The market bubble has burst, leading to a big sell-off, where more than 12.9 million shares were sold.
After that, new laws and regulations have been introduced as preventive measures. To regulate and control stock markets, the Securities and Exchange Commission (SEC) was created in 1934. The central bank also received a number of control functions, one of which is the regulation of inflation.