Difference between Recession and Deflation



The economy never settles into a constant state of activity. There can be positive or negative effects on economic activity depending on changes in the pricing structure, government policies, and consumer preferences. A high unemployment rate, low productivity, low wages, and low consumer demand are all possible outcomes of these problems. Contraction in the economy and falling prices might lead to disastrous results. Both terms are often used interchangeably, however, this article clarifies the key differences between them.

What is Recession?

Several indicators, including real income, retail and wholesale sales, gross domestic product, and industrial output, have all pointed to a downturn in economic activity in a country during the past two quarters. In general, recessions begin just after an economy has achieved its peak level of activity and end when it has fallen to its lowest level. The decline in a country's GDP is a common economic indicator of a recession.

Most recessions are very short and uncommon, yet they can cause enormous harm to economies when they do occur. But recessions are inevitable during business cycles, which are otherwise characterized by rising unemployment, slow or negative growth, and the collapse of financial institutions.

What is Deflation?

In this instance, over time, the value of both consumer goods and assets declines. At first look, this may seem like a great opportunity for consumers since they will now be able to buy things at lower prices. Although shoppers appreciate price cuts, they have their sights set on even lower costs in the future for many commodities. However, this lowers product demand, which stunts the company's expansion. Recession follows, causing a cascade of negative effects, including less investment, lower profits, job losses, and lower salaries.

The common causes of deflation include

  • Slow growth in the economy

  • Relatively high-interest rates

The only true indicator of deflation is a decline in the Consumer Price Index. It's important to remember that the CPI doesn't track key economic indicators like home prices or stock market performance. The possibility of deflation in any of these sectors will go unnoticed if the CPI is used as the indicator of deflation.

Similarities − Recession and Deflation

  • Because of both of these factors, fewer investments are made, wages are reduced, unemployment rates rise, and fewer goods are manufactured.

  • In all cases, interest rates are lowered as a means of rescuing the situation.

Differences − Recession and Deflation

The following table highlights how Recession is different from Deflation −

Characteristics Recession Deflation

Definition

When economic indicators like gross domestic product (GDP), real income, retail and wholesale sales, and industrial output all decline for two consecutive quarters, we say that the country is in recession.

When both prices at the register and the value of a person's possessions fall over time, we say that the economy is in a state of deflation.

Importance

The GDP is one statistic that may be used to measure the severity of a recession.

Deflation is measured by a decrease in the Consumer Price Index.

Components

A recession often starts not long after an economy hits its peak and continues until it reaches its minimum.

Deflation is characterized by a broad decrease in pricing for products and services.

Conclusion

When economic indicators such as gross domestic product (GDP), real income, retail and wholesale sales, and industrial production all decline for two consecutive quarters, a country is said to be in a recession. Conversely, deflation is characterized by falling consumer prices and asset values over time, as measured by a falling CPI. The rate of deflation can be expressed as a negative number. However, due to each of these factors, investment, income, unemployment, and product output are all held back.


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