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What is a Depression?

2017-06-27T15:47:42+00:00

The term 'Depression' is included in the Economics edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

Depressions in economics are loosely defined as major declines in a country’s GDP, or gross domestic product. The gross domestic product is made up of four major components. These include money that consumers spend, government spending for goods and labor, investment affected by government agencies and individual companies, and the net sum of the country’s exported products.

All of these elements are combined to come up with the country’s annual gross domestic product. Another simpler way of stating the GDP is in the counting of everything spent on services, goods, research, investments, and labor in the nation.

Depressions are then commonly said to happen as the country’s GDP drops by minimally ten percent in only a year. There is not any consensus on the precise amount of decline in terms of percentage that must occur. Following the notorious stock market crash in 1929, the Great Depression that happened in the United States and throughout Europe demonstrated a sharp decline in GDP not only the first year but also over the following years.

In the months that came after this market crash, the U.S. GDP fell by in excess of thirty percent. After that it rose for a while, though not nearly to the pre-crash levels seen earlier in the U.S. This demonstrates the difficulty in simply defining depressions simply by looking at GDP declines and increases.

The Great Depression is mostly held to have continued until the very end of the 1930’s decade. Real recovery nationally then did not begin until the outbreak of World War II in 1939. The reason that this is the case is that additional factors besides simply GDP declines have to be considered in evaluating what is and is not truly a depression.

The Great Depression had many negative characteristics besides simply falling GDP’s. With plummeting industrial output, major numbers of jobs disappeared. As significantly smaller amounts of money came into workers hands, a great deal less could be spent on consumer goods or business investments. Without this money circulating back to businesses, firms were unable to hire workers back. The numbers of people dependent on help from the public assistance funds were greater. Job recovery did not materialize as hoped.

From time to time the Gross Domestic Product did rise in the 1930’s. It never returned to the normalcy seen before the beginning of the Great Depression until the United States became fully involved in the Second World War. Demands for military equipment and weapons for the war did many things to help the American economy. Young men found employment in the army, industry suddenly had rising demand for military products, and job openings were more than the able bodied people available to fill them. At this point, women began entering jobs in industry in the place of men for the first time.

Nowadays, some respected economists worry that a depression like one not seen since the thirties could again be gripping the nation. This is because unemployment from the Great Recession remains stubbornly high, goods and services’ prices are rising at a faster pace than payrolls in the majority of industries, and requirements for public assistance are higher than they have been since the end of the Second World War. The biggest fear today is that many of the jobs that are disappearing, such as technology and manufacturing, will never return, as they are migrating overseas to countries where workers are paid significantly less.

The term 'Depression' is included in the Economics edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.