Define Depression Economy
A Depression economy is defined as a period of economic decline characterized by high unemployment rates, low consumer spending, and slow economic growth.
Depression economies have been seen throughout history, including the Great Depression of 1929-1939, the United States Great Recession of 2007-2009, and the current European debt crisis.
In many cases, these depressions were caused by a financial crisis, such as the stock market crash of 1929, the bursting of the U.S. housing bubble in 2008, and the Greek government’s inability to pay its debts. In some cases, however, the cause was not due to a specific event, but rather a long-term trend.
A depression economy may last for several years, or even decades. However, once the economy recovers, it tends to remain stable for a while before a new recession begins.
Depression is a common problem in the economy
There is no universally accepted definition of depression in economics, but frequently, it’s connected to drastic and prolonged drops in the GDP. Unemployment rates also generally trade upward significantly. It’s similar to a recession, but the economic downturn lasts longer, resulting in more crushing effects.
Economic depressions are characterized by their length, abnormally large increases in unemployment, falls in the availability of credit (often due to some form of banking or financial crisis), shrinking output as buyers dry up and suppliers cut back on production and investment, more bankruptcies including sovereign debt defaults, significantly reduced amounts of trade and commerce (especially international trade), as well as highly volatile relative currency value fluctuations (often due to currency devaluations). Price deflation, financial crises, stock market crash, and bank failures are also common elements of a depression that do not normally occur during a recession.
The depression economy has caused many people to lose their jobs
Most people lose their jobs in an economic depression, with businesses having to cut down on production or labor costs. The Great Depression affected several sectors, such as manufacturing, service, agriculture, and trade. All these contributed to an employment rate exceeding 25%.
High unemployment rates. One hallmark of a depression is skyrocketing unemployment rates. For example, unemployment reached 24.9% during the worst of the Great Depression while wages plummeted. To put that number in perspective, consider that the national unemployment rate was 3.5% in July 2022. When people lose their jobs, they lose the ability to buy things, and demand for products tends to follow.
People who are unemployed or have low incomes are especially affected by the depression economy
Recessions typically lead to lower consumer demand. People put off purchases because of less income. Unemployment rises since businesses may reduce their workforce to lower costs. The same goes for depressions, but unemployment rates skyrocket to more than 20%. Negatively affected areas also include business sectors and international trade.
Loans, mortgages, and credit card balances eat up a significant portion of an individual’s income, but it’s typically manageable when the economy is good. However, people earn less in a depression, so they redirect whatever funds they have to more essential expenses, resulting in more debt defaults due to consumers not having enough to pay their monthly dues.
Depression economy is a term coined by economists referring to the economic conditions prevalent in the United States during the Great Depression. In the 1930s, the U.S. was experiencing a severe economic crisis, and many people lost their jobs. Unemployment rates reached 25 percent in 1933, and the number of unemployed Americans increased dramatically. As a result, the national income declined significantly.
The word “depression” comes from the Latin word “depressus” meaning lowered. A depression occurs when the price of goods falls below its production cost. When prices fall, consumers buy less than they would have otherwise. This causes businesses to cut back on production and lay off workers.
An economic crisis refers to a period where the economy experiences a sharp decline in economic activity. An example of an economic crisis is the Great Depression.
A recession is a significant decrease in economic activity over several months or quarters. Recessions occur when the economy goes through a prolonged downturn.
Recovery – Recovery is the process of returning to normal after a recession. After a recession ends, the economy begins to recover.
Business Cycle – Business cycles refer to the ups and downs of the business cycle. The business cycle consists of four distinct phases: expansion, peak, contraction, and recovery.
Stagflation – Stagflation is a combination of high inflation and high unemployment. It is cause by a lack of demand for products and services.