What is the Difference Between a Depression and a Recession?

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.

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.