Is This A Recession Or A Depression? Part 1 of 2

Confused? – Most People ARE!

There is a great deal of confusion over the economic terms ‘recession’ and ‘depression’. Prior to the Great Depression in the early 1930’s, ALL downturns in a given country’s economy were called a “depression”.

Depressions Didn’t Exist Until………..

In the U.S.A. during the Great Depression, the term “recession” was first used. It was used so that people could more easily understand the difference between a smaller downturn in economic activity and more a more severe one. For example, in both 1910 and 1913, the U.S. economy declined from the previous year, but, in HINDSIGHT, they were referred to as merely recessions, because of the much deeper problem of the 1930’s.

A Recession

A recession, as defined by the Business Cycle Dating Committee at the National Bureau of Economic Research, is the decline of business activity in the economy including employment, industrial production, real income, retail and wholesale sales. Some economists won’t use the term “recession” until the decline has lasted for six months (two quarters).

The U.S.A. for example, saw its worst recession between 1974 and 1975, when the “business activity” declined by about 4.9%.

A DEPRESSION

So what do economists currently label as a depression? Technically, it is when a country’s Gross Domestic Product (GDP) is 10% lower than the previous year’s GDP, OR if the GDP drops (even if it’s less than 10%) each year for three consecutive years.

Unfortunately this raises more questions than it answers. What exactly IS Gross Domestic Product?

Gross Domestic Product

The GDP is defined as “measure of a country’s economic performance and is the market value of all final goods and services made within the borders of a country in a year”. That would include ALL transactions within the country AND between that country and others. This would include every exchange involving money. The GDP is often confused with the GNP, or Gross National Product, and while they are often very similar figures, they are not the same.

Gross National Product

The GNP is the Gross National Product, which refers to the PEOPLE, who not all may be in the same physical location. E.g. GNP of all United States citizens will be somewhat different to the GDP of the Nation called the U.S.A. Put more simply, GNP refers to people, and GDP refers to a country.

Tomorrow I’ll talk about what the world is currently experiencing.

Luke.