Depression (Economics)

An economic situation characterized by decreasing business activity, falling price levels, high unemployment, excess supply, deflation, and public fear. An economic crisis that is less severe and considered a more normal part of a business cycle is usually known as a recession. A recession is defined as two consecutive quarterly declines in gross national product. If a recession continues long enough, it could develop into a depression. While recessions are typically limited to a single nation, depressions, such as the Great Depression, can encompass many countries. Although the transition point from a recession into a depression is not clearly defined, it has been noted that a decline in gross domestic product of more than 10% constitutes a depression.

Throughout the 18th century, depressions primarily had noneconomic causes, such as weather-induced crop failures or wars. Since the early 1800s, depressions have been increasingly industrial, although the Japanese recession in the 1990s was partly caused by a reduction in consumer demand. In modern times, the common causes of a severe economic downturn may include overexpansion of commerce, industry, or agriculture; underconsumption and overinvestment; a regional discourse or a war; or a stock market crash. The most notable depressions in history included the Great Depression in the 1930s, which affected most of the world; the Long Depression, which lasted from the 1870s to the 1890s; and the severe economic downturn in Japan in the 1990s.

A depression develops when demand decreases and overproduction forces a decrease in production, discharging of employees, and wage cuts. Consequently, unemployment and decreases in wages affect purchasing power, and the crisis escalates.

Governments typically apply methods to both prevent and alleviate recessions and depressions. Some economists are advocates of deficit spending by the government to encourage economic recovery, while others support a more “hands-off” method where the government does not interfere with the natural market forces. Tax rate cuts, increased public welfare, job reeducation programs, and interest rate adjustments are among the measures taken by governments to alleviate economic downturns.