Mar 15, 2019
Welcome to Finance and Fury the Furious Friday edition
If you have been paying attention to the news then you would
know about the current GDP per capita recession.
Today we will look at recessions and different policies to help
boost the economy. It is all apart of this miniseries on supply and
demand side economics.
There are lots of different views to avoid recessions and get
out of them.
What is a recession? What is a GDP per capita recession?
- A period of temporary economic decline and negative GDP growth
for 2 consecutive quarters.
- The GDP per person is declining, we haven’t had a recession
under this definition since June 1991
- If this keeps happening for 2 years, that’s when we get a
- The measurement of what we are marked against
- An aggregate measure of production equal to the sum of
the gross values added of all residents and institutions
engaged in production
The four components to GDP?
- Consumption, usually the largest component of GDP. The value of
consuming by individuals in the economy.
- Investment, it is business investments in new equipment and
services. Buying things for the business to operate, this gets
included in investments.
- Government spending, the sum of government expenditure on final
goods and services.
- Net exports, this is our exports minus our imports. In
addition, the services we produce that are used by other
Economics textbooks will admit GDP is flawed when it comes
to measuring production in an economy.
How do we boost GDP?
- Supply side: boost domestic demand through cutting taxes and
- Demand side: boost domestic demand through expansionary
monetary policy, or expansionary fiscal policy
The Great Depression:
- Started in 1929 and lasted until the late 1930s
- What was the result?
- What triggered this? Well a major fall in the US share
- Worldwide GDP fell by 15% and it lasted over 2 years
What was the cause?
- Keynesian theory – demand driven theory. Loss of confidence
from the market crash led to a reduction in consumption and
- Why didn’t the massive spending help?
- What are the issues with increasing the money supply?
- What if there is no confidence?
- Monetarists – believe the great depression occurred normally
but the shrinking of the money supply exacerbated the economic
- It was caused by a banking crisis
- A vicious cycle started and a downward spiral accelerated
- What are the criticisms?
- What is the lack of spending or lack of money supply?
- Why was there a crash in the first place?
Australian school and Debt Deflation
- Friedrich Hayek and Murray Rothbard - wrote America's
Great Depression (1963)
- Expansion of the money supply in the 1920s, leading to an
unsustainable credit-driven boom
- It was the inflation of the money supply that led to an
unsustainable boom in asset prices and capital goods
- What was the chain of events that proceeded?
- Credit expansion cannot increase the supply of real goods
- Who is Hans Sennholz?
- Why were there protectionist trade policies?
- Why were the income tax rates raised?
- See any problems with demand side and monetarist
- Massive debt increases to fuel demand as well
- Monetary stimulus has very little effect
- Central banks print money for the sake of putting it into the
- Keynesian theory is really only effective for relatively closed
- The multiplier has been small
- If we keep trying a failing solution, why should we expect a
- What is the solution? We will cover this next Friday
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