ECON 2200 Chapter Notes - Chapter 23: Durable Good, Deflation, Human Capital

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9 Feb 2017
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The Great Depression: Part 1 (Chap 23)
I. Key Economic Indicators (Figures 23.1 - 23.4)
Note both the depth & the duration of the decline. The recovery isn’t complete until the
economy reaches and maintains pre-recession levels of output, employment, etc.
1929-1933: Real GDP fell by 1/3 (nominal GDP was lower than real GDP which means
that prices were falling)
o Industrial output fell by 1/2
o Gross investment spending (I) was reduced to almost nothing. “I” was falling
I < replacement rate
The replacement rate is the $-value of investment spending necessary
to maintain the current capital stock.
I needs to = the replacement rate
Productive capacity of US was falling
Real capital stock actually declined!
o Consumer durables output fell by 80%, and did not fully recover until 1940.
By comparison, in the early-1920s recession consumer durables output
fell by 43%, but it had fully recovered by 1923.
Unemployment Rate:
o 1929: UR = 3.2% (1.5 million)
o 1933: UR approaching 25%
11.5 mill unemployed
2.2 mill in government-created emergency jobs
Many more were “underemployed:” working, but for fewer hours than
desired or at a job that does not fully utilize worker’s human capital
1933 estimate of a revised unemployment rate, including 1) officially
unemployed 2) government emergency workers 3) underemployed
total = about 33% of the labor force
o Duration
UR remained > 10% for a decade
Many never recovered
Deflation:
o 1929-1933: CPI fell by 25%
Bank Failures:
o 1930-33: nearly 10,000 banks closed
About 1/3 of banks that existed in 1929 had failed by 1933.
Billions of dollars in depositor & shareholder losses
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