The Great Depression
Key stats in the US
- Unemployment = 25%
- worldwide trade decreased by 33%
- Worldwide economic output decreased by 50%
Gold standard: money could be exchanged for gold, problem was that everyone wanted to swap their money for gold and so the supply of gold was quite low..?
US responses to great depression
- Herbert Hoover put trade protectionism measures on bananas, wheat and sugar
led to trade wars where protectionism fight between US and other countries - led to less world trade and
- contractionary fiscal policies implemented as a result
- increased interest rates to decrease amount of people swapping money for gold
- When Franklin Roosevelt elected, he introduced the NEW DEAL plan (like Green New Deal of Biden’s) - opposite of Hoover by allocating 10.7% of GDP for government spending
- abandoned the gold standard by making it illegal, and so now decreased interest rates (expansionary monetary policy)
- removed trade restriction
UK depression impacts and responses
trade decreased by 50%
Economy contracted by 5% and unemployment rose by 70%
UK = contractionary fiscal policy in order to balance the budget
UK then chose to leave the gold standard in 1931, 2 years before the US (YES) -> had better money supply and low interest rates before the US -> recovered significantly faster than the US
UK response and impacts to Great Recession
- Real GDP fell by 10%
- unemployment doubled
- world trade was disturbed
Reduced its interest rates from 5.75% to 0.5% to stimulate AD
Quantitative easing was used (expansionary monetary) and cutting interest rates
Expansionary fiscal policy - 2.2% of GDP by gov
Increased spending on healthcare and education
Fiscal policy
- Government expenditure, taxation (indirect = tax on expenditure, direct on income and wealth) and borrowing i.e funding hospitals to be run, not to build them.
- Fiscal balance, budget deficit/surplus/balance
AIM:
- fix market failures
- change financial distribution of income and wealth - fiscal drag from holding tax thresholds, instead
- stabilising/stimulate GDP/AD
- National insurance increase: 13.8% -> 15%
- VAT = 20%
- Universal credit now covers JSA n other stuff - now capping benefits and making it harder by making it means tested
- Transfer payment, you don’t get anything back ( welfare)
- 2023-24 Spent £341bn on social protection - most is pensions, health spending = £245bn
how does government improve equity
- £268bn from income tax, £187bn from VAT
- Taxes can be to regulate or incentivise less consumption of demreit goods, redistribution of wealth and income
horizontal equity, similar tax payers in similar circumstances should be treated equally in term so f tax liabilities.
