“TWO BIG SHIFTS IN AGGREGATE DEMAND:THE GREAT DEPRESSION AND WORLD WAR II”

CEC Report
For
EFM
On Case Study-8
“TWO BIG SHIFTS IN AGGREGATE DEMAND:THE GREAT DEPRESSION AND WORLD WAR II”
By
Mayur Shimpi
Aesha Shah
Isma Shaikh
Sandip Patel
Sabiha Bhuta

MBA (Sem-1)

ZADESHWAR
Bharuch

INTRODUCTION:
The following case which is been prepared by our group is based on the shifts in aggregate demand curve; due to the two most massive events been took place in the past. Those were :
1. The Great Depression
2. World war II
The Great Depression was a global economic crisis that may have been triggered by political decisions (war reparations post-World War I), protectionism (Congressional tariffs on European goods) or by speculation (the Stock Market Collapse of 1929). Worldwide, there was increased unemployment, decreased government revenue, a drop in international trade. At the height of the Great Depression in 1933, more than a quarter of the US labour force was unemployed. Some countries saw a change in leadership as a result of the economic turmoil.
When Was The Great Depression?
In the United States, the Great Depression is associated with Black Tuesday, the stock market crash of 29 October 1929, although the country entered a recession months before the crash. Herbert Hoover was then President of the United States. The Depression continued until the onset of World War II, with Franklin D. Roosevelt following Hoover as president.
The Great Depression was the result of an unlucky combination of factors – a reticent Fed, protectionist tariffs and a Keynesian, government-centered recovery plan. It could have been shortened or even avoided by a change in anyone of these. Many supporters of the government's intervention point out that the quick recovery from other depression/recession cycles may not have occurred as rapidly in 1929 because it was the first time that the general public, and not just the Wall Street elite, lost large amounts in the stock market. Similarly, the Fed can avoid fault because it didn't know that the government would pass a trade-crushing tariff and take other questionable measures. There was not yet a "too big to fail" mentality at the public policy level.
A five-year bull market peaked on 3 September 1929. On Thursday 24 October, a record 12.9 million shares were traded, reflecting panic selling. On Monday 28 October, panicked investors continued to try to sell stocks; the Dow saw a record loss of 13%. On Tuesday 29 October 1929, 16.4 million shares were traded, shattering Thursday's record; the Dow lost another 12%.

Total losses for the four days: $30 billion, 10 time’s federal budget and more than the U.S. had spent in World War I ($32B estimated). The crash wiped out 40 percent of the paper value of common stock. Although this was a cataclysmic blow, most scholars do not believe that the stock market crash, alone, was sufficient to have caused the Great Depression.

WORLD WAR II
No one wanted war. Yet, when Germany attacked Poland on September 1, 1939, other European countries felt they had to act. The result was six long years of World War II. made World War II the deadliest conflict in human history. World War II (WWII or WW2), also known as the Second World War, was a global war. It is generally considered to have lasted from 1939 to 1945, although some conflicts in Asia that are commonly viewed as becoming part of the world war had been going on earlier than that. It involved the vast majority of the world's nations—including all of the eventually forming two opposing military alliances: the Allies and the Axis. It was the most widespread war in history, with more than 100 million people, from more than 30 different countries, serving in military units. In a state of "total war", the major participants threw their entire economic, industrial, and scientific capabilities behind the war effort, erasing the distinction between civilian and military resources. Marked by mass deaths of civilians, including the Holocaust and the only use of nuclear weapons in warfare, it resulted in an estimated 50 million to 85 million fatalities.

During the early 1940s, the United States entered World War II.
Government had to devote many resources to the military.
Government purchases of goods and services increased almost fivefold from 1939 to 1944,that led the rise of production up to 20% in price level. Unemployment fell from 17 percent (1939-1944) to about 1 the lowest level in U.S. history.

Positive aspects of World War 2:
The common view among economic historians is that the Great Depression ended with the advent of World War II. Many economists believe that government spending on the war caused or at least accelerated recovery from the Great Depression, the economy rose drastically. There was a growth in economy due to the mass production of war material. It did help in reducing unemployment .The rearmament policies leading up to World War II helped stimulate the economies of Europe in 1937–39. By 1937, unemployment in Britain had fallen to 1.5 million. The mobilization of manpower following the outbreak of war in 1939 ended unemployment. The US' entry into the war in 1941 finally eliminated the last effects from the Great Depression and brought the U.S. unemployment rate down below 10%. The Great Depression indisputably ended during World War II, which is when the output gap closed. But was it causal? Like everything else about the Great Depression, it's really hard to know. There are other non-spending factors. Commodity prices spiked in 1939 due to the war, which was good for the resource-rich American continents. American labor started leaking abroad as foreign labor markets tightened. Undoubtedly a lot of firms who made things that warring Europeans needed saw a dramatic improvement in their optimism. Our figures for the period are rather primitive, so it's harder to measure things like business confidence than it would be now.
One thing that makes the question difficult to answer is that it's hard to know when to date the beginning of the recovery. Some prefer 1940, but argues that net exports cannot justify this as a result of war spending. (By 1941, I think, you cannot reasonably read US history and conclude that America was not defector ramping up production for a war) But there had been another nasty recession in 1938, and recovery after recessions is unusually fast. Economies are complicated things. Absent the war, would the economy have grown in 1939 and part of 1940, then sunk back into the doldrums? I don't think we know. There is no simple narrative of the Great Depression that allows you to attribute the ultimate recovery to trend output to the simple magic of the New Deal.