Recession
(Redirected from Economic depression)
A recession is defined in macroeconomics as a decline in a country's real Gross Domestic Product (GDP) for two or more successive quarters of a year (equivalently, two consecutive quarters of negative economic growth). A recession may involve simultaneous declines in coincident measures of overall economic activity such as employment, investment, and corporate profits. Recessions may be associated with falling prices (deflation), or, alternatively, sharply rising prices (inflation) in a process known as stagflation. A severe or long recession is referred to as an economic depression.
Market-oriented economies are characterized by economic cycles, but actual recessions (declines in economic activity) do not always result. There is much debate as to whether government intervention smooths the cycle (see Keynesianism), exaggerates it (see Real business cycle theory), or even creates it (see monetarism).
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Causes of recessions
The precise causes of recession are the subject of fierce debate among academics and policy makers. Most would agree though that recessions are caused by some combination of endogenous cyclical forces and exogenous shocks. For example, Keynesian economists, Real business cycle theorists, and Monetarists would all disagree about the precise cause of the business cycle, but most would agree that purely exogenous factors like the price of oil, weather conditions, or a war could by themselves cause a temporary recession, or, conversely, short term economic growth.
The Great Depression
Prior to the Great Depression, a huge wave of investing in the stock market had taken place, which created artificially high prices of stock. This process was driven by the fact that shares were being used as a collateral for loans in order to buy more stocks (ie. buying stocks on margins). When the economy showed signs of slowing and share prices plummeted, this caused an extensive domino effect. As investments lost their face value and the loans on them "went bad," many financial institutions collapsed, triggering a monetary crisis. This led to the the famous run on the banks, in which massive withdrawls of bank deposits led some banks to collapse, confirming investors' fears and inspiring more withdrawls.
When U.S. President Franklin D. Roosevelt entered office in 1933, he began an aggressive program of reform called the New Deal with three goals, to provide immediate relief for the unemployed, to recover the economy to normal levels, and to reform the system so it would never happen again. Roosevelt got GNP moving upward again, with 11% annual growth 1933-36.
To date no repetitions of the Great Depression have happened in the industrial world. However, Many Latin American countries suffered a severe economic slump coupled with high inflation in the 1980s, Japan suffered from a depression during the 1990s, and the former Communist states of central and eastern Europe also fell into an economic depression during the transition to capitalist economies. Additionally, the term "depression" may be used to describe the situation of many poorer countries in the Third World (although in many cases these countries never achieved sustained economic development in the first place).
The Great Depression in Europe was one of the reasons for the public acceptance of Adolf Hitler and other extremist fascist groups. Their power was the main cause of World War II which, ironically, was a source of great (but costly) economic stimulation.
Notes
See also
External links
- The Thirty-Five Most Tumultuous Years in Monetary History: Shocks and Financial Trauma, by Robert Aliber. Presented at the IMF
- Recession? Depression? What's the difference? (About.com)
Categories
Articles lacking sources from June 2006 | All articles lacking sources | Recessions | Macroeconomics | Market trends | Business cycle