Education | What is the difference between a recession and a depression?
What is the difference between a recession and a depression?
February 2007
Great question. Unfortunately,  there isn’t a standard answer, although there is a well-known joke economists  like to tell regarding the difference between the two. But, let’s come back to  that later. 
Recession
Let’s start by defining a  recession. As I mentioned, there are several commonly used definitions of a  recession. For example, journalists often describe a recession as two  consecutive quarters of declines in quarterly real (inflation adjusted) gross  domestic product (GDP).
The definition used by economists  differs. Economists use monthly business cycle peaks and troughs designated by  the National Bureau of Economic Research (NBER) to define periods of expansion  and contractions. The NBER website lists the peaks and troughs in  economic activity starting with the December 1854 trough. The website also  defines a recession as:
A recession is a significant decline in economic activity  spread across the economy, lasting more than a few months, normally visible in  real GDP, real income, employment, industrial production, and wholesale-retail  sales. A recession begins just after the economy reaches a peak of activity and  ends as the economy reaches its trough. Between trough and peak, the economy is  in an expansion. Expansion is the normal state of the economy; most recessions  are brief and they have been rare in recent decades.
Depression
While there is also no standard definition for  depression, it is commonly defined as a more severe version of a recession. In  his popular intermediate macroeconomics textbook, Gregory Mankiw (Mankiw 2003)  distinguishes between the two: 
There are repeated  periods during which real GDP falls, the most dramatic instance being the early  1930s. Such periods are called recessions if they are mild and depressions if  they are more severe.
As Mankiw pointed out, perhaps  the most famous economic downturn in the U.S.’s (as well as the world’s)  economic history was the Great Depression, often described as starting in 1929 and  lasting at least through the 1930s and into the early 1940s, a period that  actually includes two severe economic  downturns. Using the NBER business cycle dates, the first downturn of the Great  Depression started in August 1929 and lasted 43 months, until March 1933, far  longer than any other twentieth century contraction. The economy then expanded  for 21 months, from March 1933 until May 1937, before suffering another  downturn: from May 1937 until June 1938, a period of 13 months, the economy  again contracted. 
Degree of Severity
One quick way to illustrate the difference between the severities of the  economic contractions associated with recessions over the period from 1930 to  2006 is to examine the annual growth rates of real GDP (in chained year 2000  dollars). Chart 1 shows the annual growth or contraction in the economy. The  gray bars represent recessions identified by the NBER. The two most severe  contractions in output (excluding the post-World War II adjustment from 1945 to  1947) occurred during the Great Depression of the 1930s.
Chart 1: Annual growth rate of Real GDP (%)
In a March 2, 2004, speech at Washington and Lee University, then Governor, and now Fed Chairman, Ben Bernanke, contrasted the  severity of the initial downturn during the Great Depression and the most  severe post-World War II recession of 1973-1975. The differences are telling:
During the major contraction phase of the Depression,  between 1929 and 1933, real output in the United States fell nearly 30  percent. During the same period, according to retrospective studies, the  unemployment rate rose from about 3 percent to nearly 25 percent, and many of  those lucky enough to have a job were able to work only part-time. For  comparison, between 1973 and 1975, in what was perhaps the most severe U.S. recession of the  World War II era, real output fell 3.4 percent and the unemployment rate rose  from about 4 percent to about 9 percent. Other features of the 1929-33 decline  included a sharp deflation—prices fell at a rate of nearly 10 percent per year  during the early 1930s—as well as a plummeting stock market, widespread bank  failures, and a rash of defaults and bankruptcies by businesses and households.  The economy improved after Franklin D. Roosevelt’s inauguration in March 1933,  but unemployment remained in the double digits for the rest of the decade, full  recovery arriving only with the advent of World War II. Moreover, as I will  discuss later, the Depression was international in scope, affecting most  countries around the world not only the United States.   
While you can see from the above discussion that recessions  and depressions are serious business, some economists have been known to  suggest that there is another more casual way to explain the difference between  a recession and a depression (recall that I began this answer with a promise of  a joke):
When your neighbor loses their job,  it’s a recession.
When you lose your job, that’s a  depression!
References
Ask Dr. Econ. May 2002. “What are business cycles and how do  they affect the economy?” Federal Reserve Bank of San    Francisco website. 
Bernanke, Ben S.  2004. “Money, Gold, and the Great Depression” Board of Governors of the Federal Reserve  System, Washington, DC. March 2, 2004. 
Greenwald, Douglas, Editor in Chief. The McGraw-Hill Encyclopedia of Economics.  McGraw-Hill, Inc., New York,  Second Edition. See Business Cycles, pages 96-104, by Geoffrey H. Moore.
Mankiw, N. Gregory. 2003. Macroeconomics. Worth Publishers, New York,  Fifth Edition. See Chapter 1. page 4.