Depression vs. Recession

The Economy as Hole-in-the-Road

In this picture of a hole in an up-hill road, the various components relate to the economy as follows:

HillLong-Term Economic Trend
RoadActual Economic Performance
HoleDepression
IntoRecession
OutRecovery

The driver experiences this hole in the context of going uphill -- that is, in a growth-trend frame of reference. There will be a nast bump, even though the entire inside of the hole is sloping uphill -- this hole won't even hold water. If the not-sufficiently-uphill slope were to continue for any distance, the hole would get dangerously deep.

When viewing the economy in the same growth-trend frame of reference, any drop of actual performance below the long-term trend constitutes a recession -- even if the growth rate is above zero (i.e., uphill). A depression is the hole which results from having gone into a recession. It can get quite serious even if an actual contraction (downhill slope) doesn't occur.


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