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Definition: Depression is defined as a severe and prolonged recession. A recession is a situation of declining economic activity. Declining economic activity is characterized by falling output and employment levels. Generally, when an economy continues to suffer recession for two or more quarters, it is called depression.
Description: The level of productivity in an economy falls significantly during a depression. Both the GDP (gross domestic product) and GNP (gross national product) show a negative growth along with greater business failures and unemployment.
When a recession continues to take its toll on any economy, the built in process triggers further cuts in investment as well as consumption spending due to loss of confidence among investors and consumers. Also, the financial crisis may lead to decreased availability for credit. Excessive fluctuations happen in relative value of currency. Overall trade and commerce get reduced. The Great Depression of 1929 is considered to be the most classic example of a depression in economic history.
Also See: Deflation, Stagflation, Agflation, Great Depression, Economic Stimulus, Contraction