What is an Economic Depression?
Economic depression - some backgrounder
We hear the term “economic depression” quite so often, especially, from the media when we watch or read the news, and from politicians when they are interviewed or giving speeches.
But do we really understand what economic depression really means? Oftentimes, some people tend to ( perhaps unintentionally) misuse or loosely use the term which really scares the general public (unnecessarily). How does this affect us and why should we pay attention to this concept? Reading on may, hopefully, provide the answer.
We will go very basic here in our attempt to simplify and make the concept more understandable to the lay person.
Thus, before directly going into the discussion of what economic depression is, let us first consider some basic terms to lay some background to help our understanding.
What is economics definition?
Economics definition is the meaning of a particular economic term like depression, recession, business cycle, etc. from the point of view of the economy or from an economic perspective as compared to a definition given by other discipline such as a definition of the same term taken from the point of view of accounting, philosophy, medicine or psychology, etc.
This, of course, is taking into account that a particular term can be defined by various discipline or field of specialization which is the same thing as looking at a particular term or word from different angles.
In other words, definitions presented in this particular hub will focus primarily on the ones provided within the field of economics. Here, economics takes on its traditional meaning, that is, it is the social science that studies how individuals, governments, firms and nations make choices on allocating scarce resources of a country or region to satisfy the unlimited wants of these individuals and institutions such as the government.
Economy is referred to as the wealth and resources of a country or region, especially in terms of the production and consumption of goods and services.
What is depression in economics
Definition depression – If in everyday jargon, depression is generally understood as a dis-ease mental condition of an individual; in economics, the same phenomenon is also observed albeit in a much larger and serious scale. It simply means that the economy is really in a very bad shape.
It is a severe economic condition wherein the available wealth and resources, due to certain abnormal economic condition, may have been so weakened, so much so, that it is in danger of not being able to support or sustain the demand of either or both the consuming public and industries.
Definition depression (technical definition) - Economicdepression is a term used to describe an adverse economic condition during a particular given period of time that has been observed to be generally unfavorable and deteriorating based on certain economic indicators and parameters. Such slump in the economy is characterized by a sustained, long-term downturn in economic activity in any one or more economies.
What is recession?
Recession is a significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP); although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession. -Source: http://www.investopedia.com. (Underscoring supplied)
The abnormal conditions that may trigger recession can be internal or external in nature, e.g., high interest rate that constrict investment, severe depressed demand for certain product and services like housing or over supply of essential goods and services (e.g., crude oil shortage), too depressed or skyrocketing prices, tight credit, global devaluation of currencies, etc..
What is the connection between economic depression and economic recession?
Economic depression is a severe and prolonged recession characterized by inefficient economic productivity, high unemployment and falling price levels. In times of depression, consumers’ confidence and investments decrease, causing the economy to shut down. The classic example of this occurred in the 1930’s when the Great Depression shook the global economy. -Source: http://www.investopedia.com. (Underscoring supplied)
Some economists consider economic depression to be a rare and extreme form of recession which is exemplified by its length, shrinking consumer purchasing power, depressed market demand for goods and services, cut back in production and investment, prevalent bankruptcy of most industry and failing debt repayment, abnormally huge unemployment surge; tightening of available credit due to banking or financial crisis, significant trade and commerce slow down both in domestic and international markets, weakened local currency characterized by value fluctuations that may be largely due to devaluation. It is a more severe economic downturn than a recession, which is seen by some economists as part of the modernbusiness cycle.
Business cycle refers to the phases of economic growth and decline. Business cycle has four stages: (1) The slowing down of the economy or “contraction” phase; (2) when the economy goes bottom pit or “recession”; (3) when the economy starts to recover or “expansion” period, and (4) when the economy reaches its full aliveness and where people are most confident (consumers buy, producers produce, investors are not afraid to invest, credits are available since banks are all out in lending, etc.) - this is called the “peak” period.
Thus, when the recession phase is unusually prolonged, when the negative impact or decline is too much to bear by all economic sectors or a greater majority of industries and by the individual consumers as documented by macroeconomic indicators that clearly show depressed figures, and when public confidence nosedived and finally crashed, then, clearly, that is the economic condition that can really be called an economic depression.
Based on the brief presentation above, what can we conclude? Perhaps, we can see that the behavior and reaction of everybody in the economy, taken together, is very essential to start or to end a contraction, recession, depression, expansion and peak periods. From this perspective, the economy is not only in the hands of the government; it is dependent primarily on the rational behavior of the general populace. For this reason, it is also very important that the officials that you put in office of governance shall have the sincerity to serve as well as the competence to lead and make the right decisions.
On the part of the citizens, it is very important to contain your fear in any given situation because any panic buying or irrational exuberance, for example, can trigger any of the negative phase of the business cycle. Any irrational reaction may turn everyone a loser; conversely, a rational behavior may save the situation, thus, making everyone a winner.
Who decides or determines recession? In the U.S., it is the National Bureau for Economic Research (NBER), an independent, nonprofit research group based in Massachusetts that monitors the business cycle. The NBER defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.”
Thus, the next time you are overtaken by panic attacks about your purchases or your income generating capacity and status are being challenged and where some economic decisions are required, stop and think (hopefully positive thoughts) first . . . you are part of the economy. Chances are, you can be a part of the solution.