Mr.

Rey Belen

A recession is when your

neighbor loses his job.
A depression is when you
lose your job.

The difference between the two

terms is not very well understood
for one simple reason:

There is not a
universally agreed upon
definition.

Recession: The Newspaper

Definition
The standard newspaper definition of

a recession is a decline in the Gross

Domestic Product (GDP) for two or
more consecutive quarters.

This definition is unpopular with

most economists for two main
reasons.
First, this definition does not take into
consideration changes in other variables.
For example this definition ignores any

changes in the unemployment rate or

consumer confidence.

Second, by using quarterly data this

definition makes it difficult to pinpoint

when a recession begins or ends.
This means that a recession that lasts ten

months or less may go undetected.

Recession: The BCDC

Definition
The Business Cycle Dating Committee

The Business Cycle Dating Committee

at the National Bureau of Economic

Research (NBER) provides a better way
to find out if there is a recession is
taking place.
This committee determines the amount
of business activity in the economy by
looking at things like employment,
industrial production, real income and
wholesale-retail sales.

Recession: The BCDC

Definition
The Business Cycle Dating Committee

They define a recession as the time

when business activity has reached

its peak and starts to fall until the
time when business activity bottoms
out.
When the business activity starts to
rise again it is called an expansionary
period. By this definition, the average
recession lasts about a year.

Depression
Before the Great Depression of the

1930s any downturn ineconomicactivity

was referred to as a depression.
The term recession was developed in
this period to differentiate periods like
the 1930s from smaller economic
declines that occurred in 1910 and 1913.
This leads to the simple definition of a
depression as a recession that lasts
longer and has a larger decline in
business activity.

The Difference
A good rule of thumb for determining

the difference between a recession

and a depression is to look at the
changes in GNP.
A depression is any economic
downturn where real GDP declines by
more than 10 percent.
A recession is an economic downturn
that is less severe.

Why do government budget

deficits grow during
recessions?
1.
The economy goes into recession,
costing many workers lost their jobs,
and at the same time causing
corporate profits to decline.
This causes less income tax revenue to

flow to the government, along with less

corporate income tax revenue.
Occasionally the flow of income to the
government will still grow, but at a slower
rate than inflation, meaning that flow of
tax revenue has fallen in real terms.

Why do government budget

deficits grow during
recessions?
2.
Because many workers have lost
their jobs, there is increased use of
government programs, such as
unemployment insurance.
2. Government spending rises as more

individuals are calling on government

services to help them out through tough
times.

Why do government budget

deficits grow during
recessions?
3.
To help push the economy out of
recession and to help those who
have lost their jobs, government
often create new social programs
during times of recession and
depression .

Government receives less

money from taxpayers, on
the other hand, government
spends more money. Money
starts flowing out of the
government faster than it
comes in, causing the
governments budget to go
into deficit.

Why dont prices

decline during a
recession?

Inflation

changes in the level of

prices

1. The supply of money goes up

2. The supply of goods goes down
3. Demand for money goes down
4. Demand for goods goes up

We would expect that the demand for

goods to rise faster than the supply, all
else being equal.

Deflation

opposite of inflation

1. The supply of money goes down

2. The supply of goods goes up
3. Demand for money goes up
4. Demand for goods goes down

We would expect that the demand for

goods to decline faster than the supply,
all else being equal.

Implicit Price Deflator

for GDP economic indicators procyclical

The inflation rate is high during

booms and low during recessions

The previous information shows that
the inflation rate should be higher in
booms than in busts, but why is the
inflation rate still positive in
recessions?

All else is not equal!

The money supply is constantly

expanding, so the economy has a

consistent inflationary pressure given
by factor #1 (Inflation)

RECESSION IN AMERICA
November 1973 March 1975 GPD

fell 4.9%
This would have caused deflation,
except that the money supply rose
rapidly during this period.
While inflation rates are generally
lower during recessions, we can still
experience high levels of inflation
through the growth of money supply.

Key point
While the inflation rate rises during

boom and falls during recession, it

generally does not go below zero due
to a consistently increasing money
supply.