Depression, a situation in which output per head of population in an economy is low compared to the level attainable at full capacity. There is generally said to be a depression or recession when there are idle resources, especially labour, not being used in production. In trade cycle theory the term is often extended to cover the 'depression phase' of the cycle during which total output, the rate of employment and other 'indicators' of economic activity are failing. The word 'depression' is commonly reserved for relatively large falls in output and employment; the word 'recession' is used for less severe reductions.
Depressions or recessions are part of the trade cycle process which is common to industrial, capitalist societies, where they are recognizable and measureable in terms of output, employment, etc., and perhaps also to some other economic systems where they may be suppressed. Before World War II the cyclical process was an alternation of prosperity with depression over a typical, though not regular, period of seven to ten years. Since the war alternation has been more frequent but shallower. The causes of this phenomenon have been studied by many economists and substantial agreement now exists on important points.
In a depression total demand in the economy falls short of the output of which it is capable when fully employed. Measures to cure depression therefore concentrate on increasing total demand by increasing private consumption (e.g. by reducing income tax), stimulating private investment (lowering interest rates) or increasing Government spending without equivalent increases in taxation ('deficit spending').
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