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What Is Depression?

In economics, depression is defined as a significant and long-term decline in economic activity marked by decreasing production and job opportunities levels. Depression is the term used when an economy has been in recession for two or more quarters.

Deeper Definition

During a depression, an industry’s profit plummets dramatically. The GDP (gross domestic product) and the GNP (gross national product) are declining, indicating a rise in company failures and layoffs.

When a recession persists in wreaking havoc on the industry, the built-in mechanism causes additional reductions in investment and consumption expenditure as investors and users to lose faith.

The following economic factors indicate depression:

  • Unemployment rates have risen significantly.
  • A reduction in credit available
  • They are dwindling productivity and output.
  • GDP growth that is constantly negative
  • Bankruptcies
  • Reverts on sovereign debt
  • Reduced global trade and commerce
  • Stocks are in a bear market.
  • Long-term asset price instability and currency depreciation
  • Inflation is low to non-existent, and even deflation is possible.
  • It increased the savings rate.

In terms of duration, some economists feel that depression occurs just when an economy’s economic activity begins to decline, while others believe that it lasts until the economy’s activity gets back to normal.

Additionally, the financial crisis may result in a reduction in loan availability. In the relative value of money, there are excessive swings. Overall, trade and commerce suffered a setback.

Depression Example

Let us go back in time and look at an example.

The Great Depression began in October 1929, when the US stock market plummeted with a record number of shares exchanged $12.9 million. When the Dow Jones Industrial Average plunged by 12% in a major sell-off, the depression erupted in the United States.

Though this began in the United States, it affected people all across the globe for more than a decade. A reduction in consumer spending and investment, as well as catastrophic unemployment, hardship, famine, and political chaos, all contributed to the Great Depression. In the United States, unemployment peaked at over 25% in 1933 and remained in the double digits until 1941, when it finally fell to 9.66%.

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