What is a Recession?

As we emerge from the pandemic, we’re hearing a lot of talk about a “recession”, but what exactly does that mean? The exact definition of a recession is a significant decline in economic activity over a long period of time. This can occur when the nation’s Gross Domestic Product (GDP) is negative. Other signs of a recession can be higher rates of unemployment, plummeting retail rales, and much more for a few months to even a few years. The government of Canada determines whether the country’s economy has entered or exited a recession. A recession means that the economy struggles in more ways than one, from rising unemployment rates to a decrease in sales in corporations. 

Factors that Cause Recessions

There are quite a few factors that could lead to a national or global recession. One of the more obvious and recent ones is a sudden economic shock. The best example of this factor is the COVID pandemic. During these recent unprecedented times, our economy suffered greatly. Unemployment rates were at an all-time high and many businesses went bankrupt. An enormous amount of inflation or deflation can also be a dangerous factor that eventually leads to a recession. It is the federal bank’s responsibility to monitor inflation and deflation rates. Although a steady inflation rate is good for the economy, an excessive amount of inflation can lead to a recession, and it has many times in the past. Some other factors that can lead to a recession is excessive debt for individuals, businesses, and corporations, as well as asset bubbles. When investors become too optimistic during a strong economy, an irrational rate of investment can lead to inflation. 

Recession vs Depression

Although the two have very similar causes, an economical depression is far worse. In comparison, a recession is much worse than a depression. During an economic depression, unemployment rates skyrocket, and there is a much more drastic decline in GDP. An economic depression lasts for several years and affects everything on a much larger scale. The effects of a depression can take several years to recover from, while a recession itself doesn’t last nearly as long.

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