Depression: What is Economic Depression?

The downturn in the economic condition of the world refers to a depression period. This occurs when a series of negative activities lead to financial turmoil, due to the low Gross Domestic Product rate. The economic depression is more serious than the Recession. The DGP rate in the former drops significantly and the condition lasts for several years.

Understanding Depression

One of the common economic depression examples is the Great Depression that took place in the United States. During this time, the unemployment rate in the country hiked to 25% while the wages dropped by a whopping 42%.

The main cause of economic depression is the lower demand for goods and services, which results in SMEs and large-scale companies going out of business. The lower demand for goods means the companies have to make important decisions to improve the budget. For instance, they may employ fewer workers and offer lower wages. Depression doesn’t occur as frequently as the mild recession, that’s because the GDP rate must drop by at least 10% in the Fiscal Year for a depression to occur.

Some economists believe that depression lasts as long as the Economy experienced declining economic condition, while others believe that this phase lasts until everything goes back to normal.

Economic Depression Causes

The primary cause of depression is the decrease in demand for goods and services in the economy, which is the result of the worsening of customers’ confidence. But, many factors can lead to depression, such as:

• Stock Market Crash
• Lower demand for manufactured products
• Low wages and prices
• Deflation
• Sudden hikes in the prices of oil
• Worsening of customers’ confidence

What Happens During an Economic Depression?

Inflation might be a sign that an economy is doing well due to the high demand for products and services, but as inflation goes out of control, it could result in depression. It discourages people from Investing in expensive goods and services, which is the primary cause of depression. A depression period in an economy leads to a worsening unemployment rate. More and more people will be out of businesses and jobs. Companies look for alternatives to cut down their expenses, and to achieve that, they reduce their workforce to only a few people.

Another signal of economic depression is the increasing credit card defaults. An increase in the number of people signing up for a credit card is a good signal, but people losing their ability to repay the debts on time indicate economic depression.

Each sector of the country has to work together in order to prevent the great economic depression. Reducing tax burden, increased government spending, and an expansionary monetary policy are a few ways the government can implement to protect the economy from depression. Central banks have learned a lot from the Great Depression, which is why they are now more willing to offer monetary help to the economy during times of economic recession. The inflation and mild recession are controlled at the earliest possible time to prevent depression.