In its most simple form, inflation can be defined as an overall increase in prices. However, the concept of inflation is actually a bit more complex than that, referring to the decrease in the spending power of a given currency as influenced by economic conditions or governmental responses to specific economic circumstances.
As explained by EconomyWatch.com, deflation is basically an overall decrease in prices. It is the opposite of inflation, and like inflation, its meaning isn't as simple as it may seem at first glance. Deflation is indicative of significant problems in an economy, which is why governments typically fight it by increasing money supply in an effort to induce inflation as a means of stabilizing prices and wages.
According to the Glossary of Economic Terms offered by the Federal Reserve Bank of San Francisco, the term recession is defined as "a significant decline in general economic activity extending over a period of time." A more specific definition is offered by BusinessDictionary.com, stating that a recession is defined by a decline in economic activity for two business quarters in a row or a six-month period.
An economic depression is, by definition, much worse than a recession. The overall economic downturn lasts much longer than two business quarters, and is typically accompanied by high rates of unemployment and a general lack of faith on the part of consumers, business owners and investors. Depressions can last for months or even years, as was the case with the Great Depression.
Most commonly heard about in association with housing crashes and mortgage meltdowns, derivatives are financial instruments or assets that derive their value from other assets. In the case of those associated with mortgages, groups of mortgage loans were sorted and arranged according to potential risk and sold in the form of financial instruments to investors. Investors saw returns on their investments as the mortgage payments were made or by selling those financial instruments to other investors at a higher rate than they paid.