Recession - a decline in a country's Gross Domestic Product

A recession is traditionally 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 real economic growth). However this definition is not universally accepted. The National Bureau of Economic Research defines a recession more ambiguously as "a significant decline in economic activity spread across the economy, lasting more than a few months." A recession may involve simultaneous declines in coincident measures of overall economic activity such as employment, investment, and corporate profits. Recessions may be associated with falling prices (deflation), or, alternatively, sharply rising prices (inflation) in a process known as stagflation. A severe or long recession is referred to as an economic depression. A devastating breakdown of an economy is called economic collapse.

Market-oriented economies are characterized by economic cycles, but actual recessions (declines in economic activity) do not always result. There is much debate as to whether government intervention smooths the cycle (see Keynesianism), exaggerates it (see Real business cycle theory), or even creates it (see monetarism).

Causes of recessions

The precise causes of recession are the subject of fierce debate among academics and policy makers although most would agree that recessions are caused by some combination of endogenous cyclical forces and exogenous shocks. For example, Keynesian economists and Real business cycle theorists 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. Austrian school economists hold that it is an inflation of the money supply that causes modern recessions and that recessions are positive forces in-so-much that they are the market's natural mechanism of undoing the misallocation of resources present during the boom or inflationary phase. Most monetarists believe that the cause of most recessions in the United States is this mishandling of the money supply, while extreme changes in the structure of the economy are responsible for very few.

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. This process was driven by the fact that shares were being used as a collateral for loans in order to buy more stocks (ie. buying stocks on margins). When the economy showed signs of slowing and share prices plummeted, this caused an extensive domino effect. As investments lost their face value and the loans on them "went bad," many financial institutions collapsed, triggering a monetary crisis. This analysis has been sharply disputed by noted monetarist economists such as Milton Friedman (dubbing the Great Depression the Great Contraction) who wrote that the Great Depression would have been merely a "garden-variety recession" if it weren't for the response of the Federal Reserve to the following runs on the banks and that most investments were made unsound by the effects of a massive deflation, the increase in real interest rates and decline of real personal and business incomes. This led to the famous run on the banks, in which massive withdrawals of bank deposits led some banks to collapse, confirming investors' fears and inspiring more withdrawals. From the beginning to end, it has been calculated that the money supply declined by one third thus forcing down production while prices adjusted.

To date no repetitions of the Great Depression have happened in the industrial world. 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).

The Great Depression in the 1930s was one of the reasons for the public acceptance of Adolf Hitler and other extremist fascist groups.