What's the difference between a recession and a depression?

Recession versus Depression

With unemployment hitting 25 percent in 1933, soup kitchens, like this one run by Al Capone, were popular during the Great Depression.
With unemployment hitting 25 percent in 1933, soup kitchens, like this one run by Al Capone, were popular during the Great Depression.

It's pretty easy to understand depressions once you get the concept of recessions. A depression is simply a prolonged or particularly excruciating recession. Economists don't really have a watermark to indicate a depression. Believe it or not, there's even an economists' joke that describes the ambiguity between recessions and depressions: A recession is when your neighbor loses his job; a depression is when you lose your job [source: FRBSF]. While the presence of a recession is debatable, when a depression hits, the issue is no longer up for debate.

Depressions are generated by the same factors that cause a recession. You can look at depression as an extended recession on the graph of the business cycle wave. Unemployment rises, gross domestic product (GDP) drops off, stock prices fall and the stock market crashes.

In simple terms, depressions are really protracted versions of recessions. In February 2008, the unemployment rate in the U.S. was 4.8 percent [source: Bureau of Labor Statistics]. But it wasn't until March 2008 that economists began to seriously consider that the economy was entering a recession. By contrast, during the Great Depression unemployment grew from 3 percent before the stock market crash of 1929 to 25 percent in 1933 [source: Bernanke]. In that same period, the U. S. gross domestic product fell by nearly half, from $103.8 billion to $55.7 billion [source: National Parks Service].

While no one wants to see the country in a depression, not everyone views a recession as a bad thing. The National Bureau of Economic Research says that expansion -- the opposite of recession, represented by the upward movement of the market wave -- is the normal state of a market [source: NBER]. But some economists take more of a Zen approach, considering recession as neither bad nor good, but part of a natural market cycle. When the Federal Reserve Bank steps in to adjust interest rates, some say this actually tampers with the natural order of the economy. Even worse, some economists believe that changing interest rates to pump up a recessing market can make matters worse by extending the decline. However, few people seem to resist when the Fed adjusts markets during a recession.

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