Great Depression and Its Economic Applications

Eco 3622

4/10/15

Part One - The Key Economic Principals in relation to The Great Depression

The Great Depression was without a doubt the most important financial and economic event that happened in the 20th century. The Great Depression was nothing short of a complete economic meltdown, which plunged the nation into complete crisis and affected every level of the population. At its worst, The Great Depression saw the nations GDP (gross domestic product) fall by over 30% and the unemployment rate peaked at 24.9%( Walton and Rockoff, page 202). Widespread panic ensued and complete uncertainty in the future of the American economy ran rampant as the nation struggled to recover from it’s lowest point in history.

People choose, and individual choices are the source of social outcomes

The Great Depression was not the result of a single factor, but rather the combined effect of an amalgamation of events. Walton and Rockoff identify two drags on the economy as the precursor to the crisis. The first drag was a downturn in residential and non-residential construction. During the “Roaring 20’s” economic prosperity had caused individual wealth to increase, which led to a boom in construction; however, the boom could not last forever and the downturn of its business cycle created a lag in the economy. The second major factor dragging the economy down was the decline in the agricultural sector. Farmers were constantly struggling with large debt and the falling prices of crops worldwide. This led to a decline in crop production. That compounded with the decline of construction set a premise for economic catastrophe when the stock market crashed.

Incentives matter

The Great Depression was the bursting of a bubble but on a massive and unprecedented scale. However this bubble was only made possible due to the aggressive and ambitious economic behavior of the American populace that was reinforced by explosive growth in the stock market. Throughout the 20’s...