recession - Causes of recessions, The Great Depression

An economic situation where demand is sluggish, output is not rising, and unemployment is on the increase. Not as severe a downturn as a depression, a recession is usually identified when gross domestic product falls for two successive quarters. Recession in the UK occurred in 1974–5 and 1980–2, and was internationally widespread in 1990–3.

A recession is defined in macroeconomics as a decline in a country's real Gross Domestic Product (GDP) for two or more successive quarters of a year (equivalently, two consecutive quarters of negative economic growth). A recession may involve simultaneous declines in coincident measures of overall economic activity such as employment, investment, and corporate profits.

Market-oriented economies are characterized by economic cycles, but actual recessions (declines in economic activity) do not always result.

Causes of recessions

The precise causes of recession are the subject of fierce debate among academics and policy makers. For example, Keynesian economists, Real business cycle theorists, and Monetarists would all disagree about the precise cause of the business cycle, but most would agree that purely exogenous factors like the price of oil, weather conditions, or a war could by themselves cause a temporary recession, or, conversely, short term economic growth.

The 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. When the economy showed signs of slowing and share prices plummeted, this caused an extensive domino effect. Roosevelt entered office in 1933, he began an aggressive program of reform 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. However, Many Latin American countries suffered a severe economic slump coupled with high inflation in the 1980s, 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 transition to capitalist economies. 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). Their power was the main cause of World War II which, ironically, was a source of great (but costly) economic stimulation.