What is the difference between Recession and Depression

Economists do remember an old joke that says: A recession is when your neighbor loses his job. And a depression is when you lose your job. What is the difference between the two terms: recession and depression? The distinction between them is not understood very well because there is no clear definition of both the terms and there is no universal agreement upon the scientists. Make a simple research: ask one hundred various economists to make a distinction between the terms depression and recession, you would get at least one hundred different answers. In our article we will try to recapitulate the terms and expound how they differentiate in such a way that almost all scientists would agree with.

First of all we will tell you about the newspaper definition of recession. Its standard newspaper definition sounds like that “a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters.” However, this definition is not approved by the majority of economists that can be explained by means of two major reasons. First of all, the newspaper formualtion does not take into account other economic changes such as alterations in the consumer confidence or in unemployment rate. Secondly, if to use quarterly data defining the recession, the newspaper definition of recession makes it difficult to emphasize the beginning and the end of a recession. As a result this approach will not detect the recession with the duration of ten months or even less.

Then we will turn to the Business Cycle Dating Committee (BCDC) Definition of the recession. The BCDC at the National Bureau of Economic Research (NBER) firstly defines the quantity of business activity in the economy with the help of such aspects as industrial production, employment, wholesale-retail sales as well as real income. The committee gives the following definition of the recession: “the time when business activity has reached its peak and starts to fall until the time when business activity bottoms out.” When the business activity begins to go up again it is defined as an expansionary period. According to this definition, the duration of an average recession is about a year. It is also difficult to define the depression. Before the Great Depression started in 1930s, any softening of economy in any economic activity was called a depression. The notion recession was made up to evolved in this period in order to distinguish such periods as the 1930s from smaller economic slacks that happened in 1910 and 1913. It tends to give not difficult definition of a depression as a recession that continues longer and has a larger diminution in business activity. So what is the distinction between the recession and the depression?

We can determine it only in a practical way looking at the alterations in the Gross Domestic Product. Usually a depression is any economic slowdown where real GDP falls by more than 10 percent. A recession is not so severe; an economic downturn in it is less. By this criterion, the last depression in the USA was during the period of May 1937 to June 1938, where real GDP declined up to 18.2 percent. If to use this method then the Great Depression of the 1930s can be defined as two individual incidents: an extremely rigid depression that occurred from August 1929 to March 1933 where real GDP dropped by almost 33 percent then was a period of recovery an later another less ascetic depression of 1937-38 happened. But one should note that the USA did not have a depression in the post-bellum period. But the worst recession for the last 60 years was from November 1973 to March 1975, when real GDP dropped by 4.9 percent.