In Economics, what is a depression?

A standard definition of economic depression is a significant decline in gross domestic product (GDP). To understand this, you need to understand the definition of a GDP.

The Great Depression was marked by low employment rates.

GDP consists of money spent by consumers, investments made by private companies and the government, government spending on labor and products, and a country’s total net exports. These facts are added together to determine a year’s gross domestic product. In the simplest terms, GDP can be seen as an accounting of almost all the money spent on goods, services, investments, research and work in a country.

Unemployment numbers are used to measure economic health.

A depression is thought to occur when GDP declines by 10% or more in a year. Economists tend to differ on the exact percentage of decline. The Great Depression in the United States and Europe after the 1929 Stock Exchange Crash showed a steadily declining GDP in subsequent years.

In the months following the crash, GDP fell by more than 30% and was then marked by a period of upswing. However, this increase was not equal to the previous US GDP. Therefore, defining a depression entirely by assessing a decline in GDP cannot be entirely accurate.

Homelessness usually increases during an economic depression.

Overall, the Great Depression was marked by a significant decline in industry and significant job losses. Making less money meant less money for consumer goods purchases or for investments. The lack of investment or purchase meant that companies could not rehire workers. Dependence on public assistance was greater and job recovery was minimal.

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Consumer spending declines during an economic depression.

Although GDP occasionally increased during the 1930s, it did not fully normalize until the United States’ involvement in World War II. This industry stimulated, employed young people as soldiers and meant that for a time there were more jobs than people to fill them. Women, for the first time, became industrial workers like Rosie the Riveter to fill jobs that would normally be held by men.

Many see World War II as the end of the Great Depression. Today, many economists fear a depression again based on the scrutiny of unemployment, the need for public assistance, and the rising costs of goods and services that are not in line with wages in most industries. This time, the biggest fear is job losses, because some manufacturing and technology industries are moving organizations abroad, where labor is less expensive.

A depression today may not be indicated by a 10% reduction in GDP, but it could be the result of business practices that aim to be more profitable. Outsourcing is a trend that can be especially costly for the average worker in the United States and, as a result, for the economy at large.

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