RECESSION
A recession is usually defined in macroeconomics as a fall of a country's real Gross Domestic Product (GDP) in two or more successive quarters of a year. A recession may involve simultaneous declines in coincident measures of overall economic activity such as output, income, employment and sales. A period of falling prices (deflation) may occur or alternatively sharply rising prices (inflation) in a process known as stagflation. A severe or long recession is referred to as an economic depression or slump. A recession can also be defined as two consecutive periods of negative growth.
Market-oriented economies are characterized by economic cycles, but actual recessions (declines in economic activity) do not always result. There is much debate as to whether government intervention smooths the cycle (see Keynesianism), worsens it, or even creates it (see monetarism).
Causes of recessions
Recessions are caused by a combination of endogenous cyclical forces and exogenous shocks. In short endogenous cyclical forces, such as inventory or profits, create a window of vulnerability in the economy that can lead to a recession, if an exogenous shock like an oil shock hits the economy.
For instance, in 2005 endogenous forces were strong; therefore, even the shock from $70 oil could not derail the U.S. expansion. In contrast, an oil shock that drove prices to a $37 in late 2000, compared with $10 in the fall of 1998 was partly responsible for sending the U.S. economy into recession, because weakness in the endogenous cyclical forces had opened a window of vulnerability.
Depression
Main article: Great Depression
Prior to the Great Depression a huge wave of investing in the stock market had taken place which created artificially high prices of stock. This process was driven by the fact that shares were being used as a collateral for loans in order to buy more stocks. When the economy showed signs of slowing and share prices plummeted, this caused an extensive domino effect, inflation greatly increased. The investments lost their face value and the loans on them "went bad", which, among other things, triggered a crisis of the banking system. In consequence, there was the famous run on banks, with people not being able to access their deposits.
When U.S. President Franklin D. Roosevelt entered office in 1933, he began an aggressive program called the New Deal with three goals, to provide immediate relief for the unemployed, to recover the economy to normal levels, and to reform the system so it would never happen again. Roosevelt got GNP moving upward again, with 11% annual growth 1933-36.
To date no repetitions of the Great Depression have happened in the industrial world. However, Japan suffered from a depression during the 1990s, and the former Communist states of Central and Eastern Europe also fell into an economic depression during the first decade of their transition to capitalist economics. Additionally, the term "depression" may be used to describe the situation of many poorer countries in the Third World (although in many cases these countries never achieved sustained economic development in the first place).
The Great Depression in Europe was one of the reasons for Adolf Hitler's election, so could be said to be a cause of World War II.
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