Recession: what is it – Dictionary of Economics


Definition of Recession

Recession is understood as a significant drop in economic activity that occurs in the economy as a whole and for a sufficient number of months, and that is visible in terms of production, employment, real income, and other indicators. The recession begins when the economy reaches its maximum and ends when it reaches its minimum. Between the trough and the trough, the economy is expanding.

Symptoms of a recession

– Increase in unemployment, given the inability to generate new jobs because there is no growth; in the case of negative growth, layoffs increase.

– Decrease in consumption, either due to the increase in prices (inflation), or due to the decrease in consumption capacity (less money, higher interest rates on credits, etc.).

– Increase in the overdue loan portfolio, caused by the debtors’ lack of payment capacity, which in turn is caused by inflation and the increase in interest rates.

– Decrease in GDP, since consumption decreases.

– Increase in inventories, especially in the manufacturing industry.

Difference Between Recession and Depression

Traditionally, the distinction between depression and recession has been established based on the different duration and intensity of each one. Accordingly, a recession became a depression when the drop in real GDP exceeded 10%, or when it lasted for more than three years. The Great Depression between 1929 and 1933 fits this definition by both criteria.

However, some economists currently point out that the differences between the two are more complex, and also have to do with their causes. Accordingly, a recession does not result from the credit bubbles, spikes in overvalued assets, severe credit contractions, and widespread price declines that are characteristic of depressions.

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A fundamental implication of this distinction is that the answers are different. A recession caused by tight monetary policy can be appreciably alleviated by lowering interest rates, but fiscal policy will be less effective. On the contrary, a depression caused by deflation, lack of credit and bubble bursts cannot be restored by changes in the orientation of monetary policy, while fiscal policy will be more useful.

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