What is an Economic Depression?

//What is an Economic Depression?
What is an Economic Depression? 2017-10-04T06:40:35+00:00

Definition: Economic depression is a time period when the economy slows down and there is widespread unemployment, lack of investments and scarce demand for consumer goods.

What Does Economic Depression Mean?

What is the definition of economic depression? During a phase of economic depression, firms are facing excess capacity because consumer spending is low and people have less disposable income to sustain consumption, thereby lowering the production and the profitability of firms. More workers are laid off due to downsizing, whereas prices generally fall.

Furthermore, investment activity is low, and the market is pessimistic about the future. The intensity of these effects increases as the economy sinks into deeper depression. In many cases this becomes snow ball that keeps getting worse until economic activity changes.

Let’s look at an example.

Example

The most prominent example of economic depression is the global economic recession of 1929. Following a series of events, including a credit boom, buying shares on the margin, a misbalance of production and consumption, and inefficiencies in the banking sector, the US stock market crashed on October 29, 1929. The shock has a great impact on many advanced capitalist countries, but especially in the USA.

Investors were bullish on the stock market considering that there was huge profit potential, and they started buying shares massively, thus causing a speculative bubble. The stock prices kept rising, but as there were not driven by financial fundamentals, they declined sharply.

The global economic recession caused an international economic recession that lasted up to ten years in various countries of the world. Known as Black Tuesday, the US stock market crash triggered the Great Depression, during which people were starving, unemployment was extremely high, and production imploded.

The Great Depression had catastrophic consequences, both in the developed and in the developing economies by affecting the international trade, the personal income tax revenues, the general price level, and the profitability of firms. The construction of new buildings froze, the agricultural operations declined up to 60%, whereas the demand for the basic goods skyrocketed.

Summary Definition

Define Economic Depression: An economic depression occurs when consumer and investor activity is low, unemployment is high, and demand for goods and services decreases.