Question

What was the similarities and difference between the great depression and the great recession 2007-2009?

Answer 1

First of all we must know the difference between Recession and Depression. Recession is when we see GDP of an economy growing but at decreasing rate or in other words when there is sluggish growth. Generally recession is said when there is sluggish growth for 2 consecutive quaters. Whereas depression is when recession is persistent for a long period of time.

Similarities:-

In time period prior to Recession the banks were giving loans to customers who were not creditworthy on large scale to expand the aggregate demand. But the boom created by the banks busted and banks started collapsing. Same way period prior to Depression was dominated by the Classical Economists which believed in Say's Law which stated that supply creates its own demand. hence there were lot of investments in the economy.

The bottom line of both the period is there were lot of investment in the economy followed by a crash or burst, which lead to collapse of banks and hence the economy and related sectors.

Another similarity is that in both the situations the way out suggested was the increased interference of government and increased spending of the government in the economy.

Differences;-

The main difference between both the period lies in the magnitude of devastation. There was lot more devastation in great depression than in Recession For eample; the unemployment rate in recession touched around 10% but in depression it reached around 25%. GDP shrinked around 4% in recession and 26.7% in depression. Same goes with other indicators such as prices, wages etc.