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Depression

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In economics, a severe and prolonged recession is sometimes called a depression. Unlike a recession, no standard definition of a depression exists. (A recession is often defined as two consecutive quarters of declining GDP though the NBER is the official arbiter of what constitutes a recession.) Like a recession, a depression is characterized by increased unemployment, reduced output and investment, and tightening credit. Price deflation and an increased number of bankruptcies are also manifestations of a depression. What ultimately causes and sustains a depression is subject to debate. Most economists agree that a recession is a normal part of the business cycle, yet the severe downturn (i.e. depression) is abnormal. One theory is that a recession can be exacerbated into a depression by policy errors. Policy errors can either create conditions that set up the economy for a fall in output or simply hinder recovery. The Great Depression that affected most of the world beginning in 1929 is the archetype.



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