What Is The Depression Or The Phase Of Contraction?

Depression is the most fearful stage of a trade cycle. The phase of depression is also called slump is characterized by low economic activities, rapid decline in general output and employment. The decline in economic activity is not uniform. There is much more decline in output in manufacturing, mining, construction and transport industries. However, there is comparatively less contraction in output in retail trade and agriculture.

Its lump, there is a marked fall in the average prices of the commodities. The costs are relatively higher. The profits of the entrepreneur decline. The purchasing power of the money is high but due to low income, there is too much contraction in effective demand for consumer goods. The expenditure on capital goods or its replacement greatly falls. Most of the firms reduce their output or close down.

The income of the share holders go down.
Depression or slump leads to redistribution of national income profits and wages falls faster relatively to rent and other fixed incomes. The bankers follow the policy of credit contraction. Due to dull business conditions, producers are also reluctant to borrow funds. In the economic life of the world, such acute crises have occurred in the years 1710, 1837, 1873, 1907 and 1929.