What it is:
A depression is a sustained downturn in economic activity characterized by high unemployment, decreased output and reduced levels of trade.
How it works (Example):
Low levels of consumer confidence during times of depression generally result in a severe drop in consumer demand and spending. This leads companies to cut costs by reducing their workforces, resulting in high unemployment and even lower consumer confidence and spending. Prices and wages spiral downward, causing more turmoil.
The Great Depression of the 1930s is the best example of the far-reaching economic and social impact a depression can have.
Why it Matters:
A depression can have devastating social and economic effects. It is generally accepted that dramatic government intervention is required in order to move an economy from depression to recovery.