“Oh no, the economic crisis is upon us!” But who really knows what that even means? Why should we care? How will it really affect anyone?

A depression occurs when the Gross Domestic Product (GDP) of a nation falls by over 10%. But what is GDP? Gross Domestic Product, in simplest terms, is all the money that is brought in by a country through the creation of goods, sale of goods, import/export of goods, any tax money MINUS all the losses seen from import/export, expenses in the country: infrastructure, health care, education, war, development aid, etc.

To simply put it, if your house was a little country and the combined income of your family was $100,000, this amount, minus all of the expenses for the year – mortgage, school fees, taxes, food, shelter, car payments, etc. – would leave your family with a certain amount. For this example, we will say that it is $50,000 leftover. This amount is the GDP of your household.

What is a recession or depression then? Now that we understand GDP, let us take a closer look at recession and depression.

GDP is always moving up and down each month, this is why it is difficult to calculate gains or losses on a month-to-month basis. Usually, economists calculate it on an annual basis. Seasonal differences make it hard to compare July, where more are out enjoying the day and spending, versus January, where it may be cold and there is a hangover from holiday spending.

By comparing Jan. 2009 with Jan. 2010 then, we can limit the change in circumstances when calculating GDP.

If the economy begins to sharply fall as has been the recent case, it is more likely to compare GDP’s by quarterly intervals (4 times a year). Some define a recession as when the GDP, regardless of by how much, has fallen over two consecutive quarters.

A depression, most experts agree, is a decline in GDP by 10% from the same period annually. (ie: a 10% GDP loss between April 2009 and April 2010) For our previous example, this means that your family now has only $45,000 ($50,000 – 10% (or $5000) left to spend this year.

Once the economy begins to falter, other parts of society are affected. With less money, your family loses confidence in the market and is more likely to hold onto that money when usually you would have spent it. This further hurts the economy when it happens on a mass scale.

Unemployment rates go much higher as funds are spread thin, prices for food rise as production, import and availability become less secure. In the current economic crisis, house prices in the US have sharply dropped as citizens are unable to make payments. Since the burden is being shared across the country, it is difficult for anyone to buy that house and its value diminishes.

While most of us live day-to-day without really seeing the direct effects of the econonomic crisis, there are many people who have lost jobs, houses and lifestyles. Some critics suggest that the economy is dictated by the powers that be and crisis’ are purposefully calculated to exert power over the public. For example, if mints decide to print more money, than each dollar is worth less.

Stimulus packages, introduced around the world, have been attempts to revive the failing economy by bringing confidence back into the market.  Ultimately, there are so many conflicting views on what is a recession or depression, and how to revive the economy, that it leaves the public out of understanding. It may never affect you, it may affect you directly.

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