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What is the Difference Between a Depression and a Recession?

In general, depressions cause hardship for everyone, not just a certain portion of the population.
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  • Written By: Tricia Ellis-Christensen
  • Edited By: O. Wallace
  • Last Modified Date: 15 August 2014
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In economics, key differences between the terms depression and recession exist. For example in the US, the last real depression was the Great Depression of the 1930s. The US economy has experienced frequent bouts of recession, however.

Generally, a recession in the economy is far less severe than a depression. It is marked by a decrease in a country’s Gross Domestic Product (GDP) over more than one quarter of a year. The GDP decrease is measured as less than a 10% decrease.

As well, economic recession tends to be measured in quarters of a year, rather than in full years. A depression is measured as a decrease in the GDP of 10% or higher in a given year. Thus, one cannot accurately describe a quarter decrease of greater than 10% as a depression unless the same conditions exist for a year.

If economic conditions improve in the fourth quarter of the year, and the GDP decrease becomes an increase, then the year is considered to have undergone a recession. If however, the GDP has steadily decreased and the year totals show a 10% or greater reduction in the GDP, then the year is considered to have been a depression.

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Recessions tend to occur with greater frequency than do depressions because the economics of a country are relatively fragile, and slight changes, or shocks, like the dot.com burst, cause decreased spending that reduce the GDP by less than 10%. Usually a diversified economy recovers from this type of shock with relative rapidity because there are other ways to spend money.

The dot.com recession did last for several years. Some people inaccurately termed this a depression. It did not reduce the GDP by more than 10%, thus the economy recessed, and was not depressed.

People tend to reach for a term that reflects more than its actual meaning. Referring to a depressed economy is evocative of the type of depression people encounter when they must make less, spend less or invest less. A recession seems more neutral or more positive in comparison.

Sometimes people will deliberately use the terms to put a negative or positive spin on declining economic conditions. A politician who supports a particular economic policy might refer to a depression as a recession to diminish the responsibility for poor policy. A politician on the opposite side of an economic policy might call a recession a depression to exaggerate the degree to which the policy is affecting people.

In reality, though, depression and recession can be measured by fairly specific terms, and economists often quite visibly correct those who use the words incorrectly.

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Discuss this Article

anon65287
Post 5

a recession is always been a worse nightmare for investors but it can be turned into worst by wrong policy and or may be because of less effective government services.

Some monopolistic conditions can exploit in favour of their own plans.

anon49191
Post 4

Is the Gross Domestic Product what people spend in the country, or what the coutry sells outside the country itself?

anon22920
Post 3

I was in a depression once. Man, I had to get out the chains to pull the truck out! It was still much easier to deal with than an outright hole. And anything is worse than an economic inconvenience (GDP drops less than 1% for the year).

anon21129
Post 2

Then when and what will be a contraction?

cayenne
Post 1

The interesting thing is that depressions and recessions get worse as people think they get worse. A lot of people make fun of the government when they seem to deny a recession, but I can understand why - once investors start getting scared, they make the recession worse by their actions.

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