Economics Essay Example | Topics and Well Written Essays - 1500 words - 3

Economics - Essay Example The fiscal expansion which came about as a result of World War 11 led to the end of that period of contraction. As some parts of the world are recovering from what has been described by many as the Great Recession, the debate is on as to whether or not the world went through a depression or a recession. Indeed there are some similarities with the Great Depression of the 1930’s but the official authorities have not characterised it as such. This paper defines recession and depression and explains the differences between them. It also looks at similarities and or differences leading up to the Great Recession which was triggered by the volatility in the stock market and a credit crunch in 2007, and those of the Great Depression which lasted from 1929 to 1933 and extended into the 1940’s. Definitions The Business Cycle Dating Committee (BCDC) at the National Bureau of Economic Research (NBER) defines a recession as a time when business activity is at its peak and therefore starts falling until it reaches its lowest level (â€Å"bottom out†) –a trough (Recession n.d.). A recession normally lasts for a year and is part of a regular business cycle which involves contractions (recession) and expansions. However, there are others which have lasted for up to two years. An example is the Japan’s economic slowdown in Japan in the 1990’s which lasted for 2 years to March 1999 can be considered as a recession since the largest peak to trough decline in GDP during that period was 3.4%. A depression on the other hand represents a slowdown in economic activity where GDP falls by more than 10% (Recession n.d.). It is characterised by rising unemployment, a sustained long term downturn in the economy and normally last for more than three years. The great depression which lasted from 1929 to 1933 and which was prolonged well into the early 1940’s with the â€Å"double-dip† is a prime example of a depression. During this perio d real GDP fell by 30% which is above the 10% benchmark. Unemployment levels soared to never before seen levels and a large number of families and single persons were losing there homes. Thousands of business closed there doors while others downsized. Differences between a recession and a depression The Economist (2009) quotes Saul Eslake, the Chief Economist at ANZ Bank as saying that the difference between a recession and a depression is more than just size and duration as noted in the definitions above. Eslake indicates that the cause of the downturn is also of importance (qtd. in The Economist, 2009). Eslake went on to state that a recession usually results from tight monetary policies while a depression is the result of a â€Å"bursting asset credit bubble†, a sharp decline in credit (contraction) and a fall in the general price level (The Economist 2009). Eslake further stated that during the Great Depression prices fell by approximately 25% and nominal GDP shrank by al most 50%. A depression Eslake suggested does not have to be as severe as in the 1930’s. They can either be mild or severe. Additionally, Eslake (qtd. in Economist 2009) indicates that the economic downturns (slumps) which followed on the heels of the collapse of the Soviet Union and the ones which characterised the Asian crises were not depression. The reason Eslake states is that inflation increased sharply. Eslake also suggested that the downturn in the e