Is this a Recession or a Depression?

There is a great deal of confusion over the economic terms ‘recession’ and ‘depression’.  Prior to the Great Depression in the early 1930’s, ALL downturns in a given country’s economy were called a “depression”.

In the U.S.A. during the Great Depression, the term “recession” was first used.  It was used so that people could more easily understand the difference between a smaller downturn in economic activity and more a more severe one.  For example, in both 1910 and 1913, the U.S. economy declined from the previous year, but, in HINDSIGHT, they were referred to as merely recessions, because of the much deeper problem of the 1930’s.

A recession, as defined by the Business Cycle Dating Committee at the National Bureau of Economic Research, is the decline of business activity in the economy including employment, industrial production, real income, retail and wholesale sales. Some economists won’t use the term “recession” until the decline has lasted for six months (two quarters).

The U.S.A. for example, saw its worst recession between 1974 and 1975, when the “business activity” declined by about 4.9%.

So what do economists currently label as a depression?  Technically, it is when a country’s Gross Domestic Product (GDP) is 10% lower than the previous year’s GDP, OR if the GDP drops (even if it’s less than 10%) each year for three consecutive years.

Unfortunately this raises more questions than it answers.  What exactly IS Gross Domestic Product?

The GDP is defined as “measure of a country's economic performance and is the market value of all final goods and services made within the borders of a country in a year”.  That would include ALL transactions within the country AND between that country and others.  This would include every exchange involving money.  The GDP is often confused with the GNP, or Gross National Product, and while they are often very similar figures, they are not the same.

The GNP is the Gross National Product, which refers to the PEOPLE, who not all may be in the same physical location.  E.g. GNP of all United States citizens will be somewhat different to the GDP of the Nation called the U.S.A.  Put more simply, GNP refers to people, and GDP refers to a country.

The theory goes like this; if a country has lots of trades within its own borders AND with other nations, then it must be doing well financially.  It is often used as an indicator of a country’s standard of living, though this isn’t always the case.

Why?  Because of several factors; for example, the value of the country’s currency compared to others can help determine the standard of living enjoyed in a given country. The type of government in power (dictatorship etc.) will have a strong influence, and most importantly, products produced IN EXCESS of what it needs to survive must be considered.

REAL wealth, whether it is individual wealth or national wealth, should only ever be measured in terms of what is available IN EXCESS of what is required to survive.  When and individual can afford buy a new car every year whether he needs it or not is a sign of having something in excess of what he needs.  Please note that I said “can AFFORD”.  If a person has to take a loan out to pay for the new car,  or a mortgage for the new house, then he cannot really afford it.

One very important thing to remember is that severe economic downturns in a country (or indeed, worldwide) are ONLY called Depressions YEARS AFTER they happened.  Because a country’s GDP has to drop by at least 10% over the previous year, or the decline lasts for three years or more, by definition it can ONLY be called a depression a minimum of one year after the fact, OR three years after (if the decline was less than 10%) .

As I write this, the world is in a steep economic decline.  In other words, there are far fewer trades going on both within any given country and between countries.  While this cannot be technically referred to as a depression, there is no doubt at all that it WILL be called a depression in the years ahead.

In conclusion, the words used to describe a situation (economic or otherwise) are just words.  What really matters is how people DEAL with that situation.  They need to learn from historical events so that they can both deal with the current situation, and make sure that they teach the next generation how to prevent it from happening again.  History does NOT have to “repeat itself”.

YOU can protect yourself from this to a large degree, but you have to understand two things; what to expect and how to prepare.

Notice I didn't say "how to REACT".  Reaction means that it's already TOO LATE; you would be reacting to something that has already happened.  Instead, you need to prepare yourself.  How?  Learn new skills.  Learn how to make your living INDEPENDENTLY of an employer.  Perhaps you can become a blogger making your income from home and offer products that people living in a depression will want and need. Maybe you can to sell other products as an affiliate on the internet.

Don't look to the politicians to save you.  They are the ones that got us into this mess and they have no idea how to get us out.  You'll have to protect YOURSELF!