Financial Crisis vs. Economic Crisis: a crisis in every country is its downturn which often negatively affects the economy’s performance. The financial and economic crises are two economic terms with adverse status of developing economies. The main difference between a financial crisis and economic crisis is that a financial crisis occurs due to the drop in the values of financial assets, while an economic crisis is an overall slump in the economy.
Let’s take a closer look at Economic vs. Financial Crisis
| Refer To | Both of these terms refer to the poor economic situation of a country |
| Result In | Both result in unemployment due to the loss of firms |
| Overcome | Financial crisis are more difficult to overcome |
| Effect | Both have a negative effect on the entire economy |
Table of Contents
What Is A Financial Crisis?
If we look at the financial crisis meaning, it is a nominal value of the rapid fall of financial assets in an economy. A financial crisis is linked with various facts, including significant changes in asset price, changes in the volume of national credit, severe balance sheet problems, disturbances in the intermediary financial activities, and large-scale government support on liquidation and recapitalization. Financial crisis are led by assets and credit movements. So if there is any kind of imbalance in asset price or credits, the economy becomes unstable and results in a financial crisis. Financial crisis may also occur due to the overvaluing of assets and will be intensified by the investor’s behavior. If all these factors remain within a country’s economy for a longer period, it may result in long-term economic recession and depression.
What Is A Economic Crisis?
If we look at an economic crisis meaning, it is a sudden economic downturn resulting in a long-term financial crisis. The economy of the country performs very poorly during both of these crisis periods. The economic crisis results in rising price levels, continuous fall in Gross Domestic Product, higher rate of unemployment, and lower investment and trade. Various factors like an asset-liability mismatch of financial institutions, an unexpected decline of values of securities and stock, and frauds like mismanagement of financial funds at large scale contribute to causing an economic crisis. The economic crisis had a severe effect on the general public. Because it increases the unemployment rate, which negatively impacts living conditions. Moreover, the downturn in the performance of financial institutes has a severe impact on the performance of the entire economy.
5 Key Differences Between Financial Crisis and Economic Crisis
| Components | Financial Crisis | Economic Crisis |
|---|---|---|
| Definition | A financial crisis can be defined as a decline in the nominal value of a financial asset in the economy. | An economic crisis is the downturn of the entire economy of a country, including household sectors and businesses. |
| Contribution Factors | Significant changes in asset price, changes in the volume of national credit, severe balance sheet problems, disturbances in the intermediary financial activities, and large-scale support of the government on liquidation and recapitalization | Various factors like an asset-liability mismatch of financial institutions, an unexpected decline of values of securities and stock, and frauds like mismanagement of financial funds at large scale contribute to causing an economic crisis. |
| Classification | Financial crisis can be classified into two different types:1-currency and sudden stop crisis-in this, there is a slump in the value of the currency and sharp depreciation of a currency2-Debt and banking crisis-a situation in which a nation is not able to survive foreign debts | Economic crisis can be classified into three types:1-Credit crisis- happens in the financial sector2-Fiscal crisis-inability of the government to pay off debts3-Currency crisis-rapid drop in the value of a currency |
| Interrelation | A financial crisis is basically a market failure in the financial sector; if there are not any actions taken it can result, it can lead to an economic crisis. | An economic crisis is a dangerous state of an economy at a given point in time. Which also has a negative impact on the general public |
| Effects | The financial crisis has directly affected the financial sectors and banking. | Economic crisis affect the economic entities in the entire economy. |
Financial Crisis vs. Economic Crisis Similarities
- Both result in instability in the economy of a country.
- Whether it is a financial or an economic crisis, the country’s economy performs very poorly during both crises.
Financial Crisis vs. Economic Crisis Examples
Financial Crisis Examples
- Stock market crashes
- Credit crunches
- Currency crisis
- Bursting of financial bubbles
Economic Crisis Examples
- The International Debt Crisis
- The Latin American Debt Crisis
- The Great Recession
- The East Asian Crisis
Financial Crisis vs. Economic Crisis Pros and Cons
Financial Crisis Pros and Cons
Pros of Financial Crisis
- A financial crisis sometimes results in an improvement in the prices of certain goods or services.
- Financial crises can also help with personal guarantees by lowering the prices of certain products and services.
Cons of Financial Crisis
- Financial crisis directly affects civilians as the rates of unemployment increase. And people are no longer able to continue their jobs.
- In this crisis, prices fall as the demand falls, which hurts the market as well as the economy of the country.
Economic Crisis Pros and Cons
Pros of Economic Crisis
- The economic crisis may result in real cash savings on real estate or for personal and business benefit.
- During the crisis, businesses found the landlords willing to negotiate on the terms, as they were concerned about a protracted downturn.
Cons of Economic Crisis
- A fall in economic output results in unemployment. That is because some firms may go bankrupt, resulting in losing workers’ jobs.
- Firms may also see a fall in demand and lower profit. Some firm cannot control their loss and even go bankrupt, which may be due to the shortage of fundamental resources.
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Conclusion
Both financial and economic crises are the terms used to describe the poor economic conditions of a country. But if we talk about financial crisis vs. economic crisis differences, both have different effects and contributing factors. A financial crisis is a situation in which the financial values fall rapidly and affects the banking and financial sectors; on the other hand, an economic crisis is a situation where a company experiences a sudden crisis due to a long-term financial crisis. Moreover, if we look at financial crisis versus economic crisis impacts, a financial crisis affects the banking sector, while an economic crisis affects all the economic activities in the country.
