What is Recession: When Do Economic Woes Become a Depression

Recession is a decline in economic activity as measured by the GDP for at least two quarters. This decline cycle usually lasts for a few months. Several indicators of weak economic performance are reflected in the results of real GDP growth, real personal income, employment (non-farm payrolls), industrial production and wholesale-retail sales (NBER).

When Recession Turns to a Depression

Depression, on the other hand, is long-term recession. If the recession drags on beyond months and reaches years then it is no longer mere recession. It is an economic depression. The worst thing that could happen is if the depression could not recover then progresses into economic collapse. Former US President Ronald Reagan's 1980 Labor Day speech provided a humorous metaphor to this dilemma: "A recession is when your neighbor loses his job. A depression is when you lose yours." What Happens When there is a Recession When recession occurs, the economy of the entire country, of course, will be affected. Recession causes various effects.

Effects of Recession

1. Company losses/closures - in a recession, businesses are the ones affected the most. Most companies would be experiencing losses and some unlucky few would be forced to declare bankruptcy. Companies experience losses because demands for their products go down. There is a marked drop in spending particularly on mundane products as most people would be saving their money for the rainy days.

2. Job losses - A natural side effect of company closures would be unemployment. Thousands, if not millions, would be laid off by these affected companies. Unemployment rates soar. Economists pegged a 1.5% rise in the unemployment rate within the 12 months as an indication of recession.

3. Real Estate declines - demand for real estate also declines since fewer investors would most likely invest in real estate during a recession. Foreclosures would oftentimes occur as buyers will not be able to pay for their houses.

4. Credit crunches - loans are difficult to avail of. With banks feeling the pinch, lending or borrowing money would be even harder.

5. Deflation - this is when the supply of money decreases and supply of goods goes up. In simpler terms it means falling prices of commodities. In a recession, there is also a sustained decrease in the price level of goods and services.

Deflation is caused by a change in the supply and demand curve for goods. During recession there is significant fall of demand since decrease in the willingness to buy is also noted. This affects the price of goods.

Consumers then have the luxury of waiting until the prices decline even further since they can delay purchases and consumption. The result is the value of money is greater before recession occurs because for same amount of money, more goods can be bought.

6. Inflation - if there is falling prices of commodities during recession, one can also note prices of some commodities climbing higher. This is inflation. Since the value of the currency such as the dollar devaluates then prices of food or energy could go up, resulting in inflation. The difference between recession and depression depends largely the severity and length of the economic downturn.