What is depression?

The depression is a phase of economic activity that is primarily characterized by a weak economy. This is mainly expressed in the low number of orders, low national income and a decline in gross domestic product. The depression follows the downturn ( recession ). It is followed by the upswing phase (expansion).

This lesson describes the main characteristics of a depression, the economic development and the behavior of individual market participants during this phase. Following this, we provide a few practice questions that you can use to check your knowledge.

Synonyms: economic downturn | Low phase

Why should you know the term depression?

Since the depression is one of the four economic phases that make up the business cycle, it is important to know this too in order to be able to better assess the overall economic situation of an economy. Understanding the business cycle in general, and the depression in particular, can be critical to making strategic decisions, such as long-term investments.

Characteristics and course of depression

According to definitionexplorer, the depression is a long-standing low in the business cycle. As in the previous phase, the recession, this period is characterized by significant declines in production, comparatively high unemployment figures and a low gross domestic product.

Company in Depression

Companies receive only a few orders and capacities are far from being fully utilized. What already started during the recession continues within the depression for the time being:

Means of production are shut down, investments are only being made at a low level and companies are trying to reduce personnel costs through layoffs, non-takeover of employees or short-time work.

Definition

In the literature there is no uniform definition of the point at which depression can be spoken of or when exactly the transition from recession takes place.

According to the Austrian economist Joseph Schumpeter, the Depression was an “abnormal liquidation”, in the course of which many things would be destroyed.

In contrast, the recession is merely a restoration of normal conditions. The depression is an economic emergency that requires government intervention. This is exacerbated by the structural crises that can arise, for example, from overcapacities in various branches of industry.

depression

Term “depression”

The term “Depression” was first used in connection with the economic crisis of the 1920s ( “Great Depression” ). At that time there was mass unemployment on an unprecedented scale.

In some cases the term “depression” is used as a synonym for economic crisis. A not insignificant effect of such a crisis is the loss of confidence on the part of market participants in the existing economic order and / or the state.

From depression to upswing

It should not be overlooked that the low point and the beginning of a new upswing phase also fall within the period of depression by definition. A slow rise in gross domestic product and an increase in investments and orders, albeit at this stage, are characteristic of exceeding this point.

Depression: phases of the business cycle

Overview of the characteristics of a recession

  • High unemployment
  • Low order numbers and overcapacities
  • Low prices and low interest rates
  • Low wages
  • High savings rate with low household consumption

 

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