by Chris Pearce

Created on: July 11, 2011   Last Updated: May 07, 2012

Recession is the term used to describe a general economic downturn featuring lower than usual levels of gross domestic product and its components, such as consumption and investment, as well as falls in employment, income, profits, and inflation. In broad terms, a depression includes all the characteristics of a recession but at a worse level and often includes additional factors such as a significant fall in asset prices, less credit, bank closures, shortfalls of goods, and deflation.

There are no official criteria separating a recession from a depression. Various benchmarks and definitions have been used over time and between places. In the United States, the National Bureau of Economic Research uses a qualitative definition of recession. It describes a recession as a significant decline in the economy of three months or more, reflected in GDP, production, sales, income, and employment figures. It then uses these and other statistics and indicators to determine if the economy is in recession and the dates involved. The NBER defined the US as being in recession from December 2007 to June 2009, with GDP falling 12.8% during this period. It doesn’t separately identify depressions but acknowledges that these are severe recessions.

Other countries don’t have the services provided by the NBER and usually use a more quantitative definition of a recession, often defining it as a fall in GDP of two consecutive quarters. Interestingly, the US recession of 2000 and 2001 would not have been defined as a recession under this definition. GDP fell in three quarters but none were consecutive. Another indicator used is a rise in the unemployment rate of at least 1.5 percentage points over 12 months. The US rate rose nearly four percentage points between mid 2008 and mid 2009 to more than 9%. Sometimes an extended period of lower than usual growth is used to define a recession.

Commonly used quantitative measures to define a depression are a fall in real GDP of more than 10% in one downturn or declining GDP over a period of at least 3-4 years or more, although sometimes two years or more is used as the benchmark. The best known economic depression was the so-called Great Depression of the 1930s. Its effects were severe, prolonged and worldwide. US gross national product fell 33% between 1929 and 1933 and the unemployment rate rose to 25%. Another period of depression, sparked by speculative real estate investments, ran from 1937 to 1942.

Up until World War II,

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