Depression in the economy: concept, causes and consequences

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:54

Depression in the economy is a condition in which almost all indicators fall for a long period. It is characterized by a reduced volume of production, low purchasing power of the population, high unemployment, and general stagnation. In contrast to the economic (or global financial) crisis, depression is characterized by a longer and more stable recession and a corresponding mood in people. However, an economic crisis often precedes it.

Depression Indicators

Depression is the worst state of the economy. It differs from stagnation by a sharp decline in indicators (sometimes even by falling prices), and from recession by greater depth and duration. The duration of depression is calculated in years, as a rule, this condition lasts more than two years. Unanimous opinion on what signs can be used to judge the onset of this negativephenomena, not among economists.

A fall in the country's GDP by 1/10 or more for at least 2 years is taken as the basic criterion for the onset of depression. For our country, the greatest threat is the decline in prices for hydrocarbons. In 2015-2016, it was short-lived, but even during this period it provoked an economic downturn and a sharp deterioration in the quality of life of many people. Whether our country enters a new depression in the coming years, and whether indicators begin to rise, will depend both on world commodity prices and on decisions that may be taken by the federal authorities.

The presence of depression may indicate the wrong economic and social policy of the state. At present, this process is most clearly expressed in Venezuela. In Russia, a similar phenomenon was noted in the 90s. XX century.

Causes of depression in the economy

• Difficult political situation. Inept domestic policy of the state, military conflicts, tough political struggle, external sanctions can provoke a decline in the economy up to the development of depression.
• Changing the situation on world markets. Countries dependent on the export of a limited number of resources (such as oil) risk falling into this state in the event of a sharp decline in the prices of exported raw materials or manufactured products. That is why economic diversification is so important now.
• Excessive, irrational and / or inappropriate government spending can lead to a decrease in incomes of the population, a decrease in purchasing power and demand forconsumer goods, which could trigger depression.
• Price increase for imported products. If a country is heavily dependent on the import of raw materials and/or products, then in the event of a sharp increase in prices for it on world markets, producers of domestic goods will face problems, which leads to a decrease in production, rising prices, unemployment, and a drop in the purchasing power of the population.
• Increase in taxes, fees. This factor can worsen the state of the economy, and if it is superimposed on an economic crisis, stagnation or recession, then the risk of these states turning into a depression will increase.
• Scientific and technological progress, tightening of international environmental standards. If a country does not keep up with this trend, then it may not fit into the new system of relations, and its products will become uncompetitive in world markets. In addition, if the state depends on the import of certain equipment, then it will no longer be able to purchase it, since it will simply cease to be produced abroad. Our country runs the risk of being in a similar situation in the future.

Standard depression mechanism

The development of economic depression, regardless of its cause, begins with a decrease in demand for manufactured products. The population starts saving and buys fewer goods. As a result, enterprises begin to reduce the volume of production, as they receive less profit than is necessary to maintain the same volumes, and some of the products end up in warehouses. At the same time, they begin to reduce purchases of intermediateproducts from other manufacturers, as a result of which they also curtail part of their production. Some employees have to be fired, transferred to a part-time job, sent on unpaid leave. Rising unemployment leads to further aggravation of the situation.

The consequences of the depression in the economy

The development of economic depression leads to a decrease in investment in future production, a decrease in large spending, which predetermines a further decline. The population prefers to purchase only the cheapest and necessary products in the minimum quantity. As a result, the assortment is reduced, stores are empty or littered with cheap consumer goods with a long shelf life. The population is becoming much poorer, and job opportunities are deteriorating. The rise in the number of unemployed further reduces consumer demand. The number of retail outlets is decreasing, as many become unprofitable. The country's position on the world stage and its image are deteriorating. Decreased creditworthiness of the state. To get out of this vicious circle, a competent and purposeful policy of the state is required. At the same time, market mechanisms may be powerless.

US Great Depression

The Great Depression in the USA (1929 - 1933) is called the most severe decline in the history of the 20th century in the world economy. It especially affected the industrial cities of developed countries, primarily the United States. Developing nations have not been hit as hard. The period of the Great Depression fell on the interval from 1929 to 1939. In thatThe country's GDP was significantly reduced over time, and the unemployment rate ranged from 15 to more than 20 percent, while before and after that it was in the range of 5%. The deterioration of economic indicators occurred very sharply and rapidly. It happened on October 28 - 29, 1929, which are referred to as "Black Monday" and "Black Tuesday" respectively.

Experts cannot name the exact causes of the Great Depression. There are only various hypotheses. In all likelihood, there was a combination of different prerequisites. The most commonly expressed are such as the impact of World War I, the crisis of overproduction, the monetary policy of the Fed, the stock market bubble, excessive population growth, the passage of the Smoot-Hawley Act in 1930.

Manifestations of the Great Depression

• During the crisis, the quality of life of many people in the US deteriorated dramatically. Particularly affected were farmers, middle class representatives, and small merchants. The impoverishment of a significant part of the country's population was observed.
• Industrial production has been reduced to the level of the beginning of the 20th century.
• Crowds of unemployed stood outside the labor exchange buildings.
• There was a drop in the birth rate, and half the population suffered from lack of food.
• Fascist and communist parties have increased in popularity in various countries, especially in Germany.

Europe's poorest countries

Determine the degree of povertycountries can be different. The easiest way is to divide the country's total GDP by the number of inhabitants. Of course, this does not take into account differences in the incomes of different groups of citizens, that is, this is an indicator of the economic poverty of the state and, to a lesser extent, an indicator of the incomes of the majority of the population.

Ukraine is considered the poorest country in Europe. The average GDP per capita here is $2,656. In second place is the Republic of Moldova. The per capita GDP there is $3,750. Bulgaria was the richest (GDP is $14,200).

Economic situation in Ukraine

Among the poorest countries in Europe, Ukraine has the largest area. Now the main role in the economy is played by agriculture, and before the events of 2014, industry also played a significant role. After its collapse and hostilities in the Donbass, the country is mired in debt and has little chance of paying it off on its own. All hopes are only for the help of partner countries, which so far are in no hurry with it. The fate of the state will also depend on the upcoming presidential elections. The restoration of the industry will be possible only after reconciliation with the Donbass.

Conclusion

Thus, a depression in the economy is a severe and prolonged decline in economic indicators, accompanied by a sharp deterioration in the quality of life of people. The reasons for this phenomenon may be different. One of the main ones is the economic or global financial crisis. With depression, production volumes fall, unemployment rises, demand for products of industries decreases, poverty and destitution increase. The brightestAn example of such a recession is the so-called Great Depression that developed in the 1930s. Now Venezuela is experiencing such problems, and in Russia this was observed in the 90s.