Sample Economics Essay Paper on Great Depression

Starting six months in the United States of America (USA) before being felt in other developed countries, the Great Depression was and remains today to be the worst shock on the international market. The shock did not only affect the U.S stock market, but it also affected the exchange rate in the international market as well as the export industry. This essay evaluates the negative effects of the Great Depression on USA as well as other developed countries that were affected by the shock. The essay argues that the shock was the worst ever witnessed in the international trade.  

Background Information

The shock started in 1929 in USA before spreading to other developed countries in the world. The spread of the shock to other developed countries in the world was as a result of the relationship that USA and developed countries had developed from the time the First World War ended. During that time, USA had emerged as the world’s major creditor. Consequently, as soon as USA suffered the Great Depression, the European countries that were struggling to come out of the negative effects of the First World War were affected significantly. Both Germany and Britain were the worst hit countries in Europe (Madsen 850). The rate of unemployment in the two countries rose significantly as it did in USA.

To a large extent, the shock was caused by the imbalances and weaknesses within the U.S economy. First, it was caused by the boom psychology of the 1920s. Second, it was caused by the collapse of the gold standard system. Other factors that contributed to shock were the financial crises in Europe, the price fall for majority of the products and cyclical contractions in demand especially in Europe.    

The Economics of Great Depression

In economic terms, the demand for labour in USA and elsewhere was lesser than the supply of labor. The graph attached below demonstrates what happened during the Great Depression. 

As it can be seen from the graph, the supply of labor was much higher than its demand. Consequently, there was surplus of labor in the market. The surplus labor in the market resulted to a high rate of unemployment that did not only affect the unemployed people, but also some of the employed people. At equilibrium, the supply of the labor is equal to the demand of labor. Therefore, there is no unemployment. However, in excess supply of labor, the supply of the labor is usually higher than the demand for labor (IMF 79). L1 shifts to L2 whereas Q2 shifts to Q3. This tends to be the case in most cases, but during the Great Depression, the supply of the labor was far much greater than in normal case. It was 25 points higher in USA and Germany. This led to high unemployment rate in USA, Europe and in other industrialized countries.

Effects

In USA, the stock market lost approximately 80 percent of its values whereas about seven thousand banks were closed indefinitely. At the same time, the rate of unemployment reached 25 percent. Today, this rate of unemployment remains the highest witnessed in the country. During the shock, it was hard to find employment. It was also hard to maintain employment especially for those in manufacturing industries. While this was taking place, the quantity of goods and services produced in the country fell by a third. Many families went hungry with very few families affording to maintain their luxurious lives.

Like in the USA, the rate of unemployment in Germany rose to 25 percent between 1929 and 1932. The rate of unemployment in Britain was relatively lower, but both export and industrial sectors suffered greatly. As a precautionary measure, majority of the countries in the world resulted to protecting their domestic trade by imposing tariffs, raising the existing ones as well as setting quotas on foreign imports (Madsen 850). This practice had significant impact on the international trade. Accordingly, by the end of 1932 the value of world trade had dropped by more than half. To some extent, majority of the countries resulted to protecting their economies from exports following the Smoot-Hawley tariff act that was enacted in USA to protect U.S farmers and businesspeople from imports. Although the act was necessary, it increased the cost of imported goods in USA dramatically.

The trade tariffs that were established during the shock affected the international market for manufactured goods, led to high unemployment rate and inflation. The impacts of the shock were far-reaching. They did not only affect developed countries, but they also affected developing countries that depended largely on exporting agricultural products. As a result of protectionism, exports in majority of the countries declined by more than 50 percent. The real GDP for majority of the countries also fell significantly. In some countries, it fell by over 15 percent. Financial crises remained the defining characteristics for the shock (IMF 79). From a theoretical perspective, the decline of the international trade during the Great Depression can be explained in terms of both barriers to foreign trade and income levels of the trade partners. Trade barriers that were imposed to protect domestic industries made foreign goods relatively expensive than domestic goods. On the other hand, the levels of income for trade partners fell significantly.

Works Cited

IMF. Staff studies for the world economic outlook. Washington, D.C: International Monetary Fund, 1997. Print. 

Madsen, Jakob. Trade barriers and the collapse of world trade during the Great Depression. Southern Economic Journal, 67.4(2001). Print.