What is Economic depression? What is Economic Recession?

Posted by on May 29, 2009 in Getting into Roots

What is Economic depression?
Economic depression is a downturn of substantial proportions in the economy of a nation that may last for years. Typically, during economic depression the Gross Domestic Product (GDP) falls and unemployment rises. During economic depression, businesses find it difficult to make profits compelling them to reduce salaries and staff. This causes unemployment to rise. Defaults in loan repayment become common, leading to increasing home repossessions. Money flow comes down. Economic depression also witnesses crises in commerce, industry and finance with steep fall in prices, credit squeeze, low productivity, vanishing investment and increasing bankruptcies.

What is Economic Recession?
Economic crisis of lesser intensity is referred to as a recession, which is of more common occurrence and considered typical of a business cycle. Recession marks a downward trend in business and is caused by an imbalance between the quantity of goods generated and the consumers’ ability to buy them. If a recession continues for long, it can turn into depression. Economic downturn is characterized by lack of confidence in business. Overproduction and unsold inventory are a conundrum difficult to solve during economic depression. Unemployment and reduced wages further aggravate the situation as people’s purchasing power decreases, causing the crisis to deepen and become more acute.

Recovery from economic depression is normally slow. The creation of new markets, exhaustion of the current inventory combined with government’s fiscal policies can restore business confidence. Owing to the international nature of current day business deals, economic depressions tend to turn global. Inadequacy of profitable investment opportunities, excessive expansion of business, agriculture or industry, failure of the banking industry or war may bring about economic depression. Prior to 18th century, non-economic reasons such as wars and famines led to economic depressions. In the modern times, reduced consumer demand has been a major reason for such depressions.

The current economic depression is characterized by serious issues that won’t disappear quickly. With the stock market and housing market bubbles bursting, millions of people have become insolvent and balance sheets have gone bust. This might take time to restore customer confidence in the market. Although it might seem difficult to survive an economic depression of this magnitude, there are ways in which it can be accomplished. There are many industries and jobs that have not been badly impacted by the economic downturn. Food, household goods, essential commodities, telecom, healthcare, military and security sectors will have robust demand even during depression as they are essentials for our very existence. These sectors can generate employment to a large number of people and thus ease the burden of economic depression. Government spending can also boost the economy to a certain extent.

One has to be extremely prudent in spending money and set aside as much as possible to meet emergencies, job loss or wage reduction. Allocate money carefully for various needs and spend only on necessities. Another recommendation to make economic depression less painful is to get out of debts as quickly as one can. In the present economic crisis, people should invest in gold. Conventionally, when the value of paper currency is low, the value of gold is high. When people’s faith in financial system is eroded, the value of gold rises. Depression or not, the value of gold is assured to remain high. Hence, gold is an excellent investment option during dire economic periods. Another way to protect money is to diversify one’s currency holdings. It is prudent to park one’s money in multi-currency accounts that can hedge the depositor against depreciation. People need to devise innovative methods to beat economic depression.

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