GDP fell 25% during the three years following the end of the First World War.
Unemployment rose to 20%
UK experienced deflation of 10% in 1921, and 14% in 1922
Causes of fall in GDP
End of First World War led to sharp fall in government spending which accounted for a large part of the fall in GDP
UK’s return to the gold standard made UK exports expensive leading to lower demand.
Trade slow to recover in the aftermath of First World War and reparations on Germany. (Keynes opposed Versailles Treaty on ground crippling reparations would harm European trade)
Great Depression 1930-33
GDP fell 5.1% in 1930-31.
GDP fell less in the UK than other countries. But, this was against a backdrop of the poor economic performance of the 1920s. Leaving the gold standard in 1931, helped the UK recover quicker than other countries.
Unemployment rose to over 22%
The effects of the great depression were highly geographical. Manufacturing heartlands in north and Wales much more affected than the South and London.
Laissez-faire economics is defined as a situation with minimal government intervention. Under laissez-faire, governments and regulators ‘leave alone’ private firms to allow them to make decisions about production and output. In particular, laissez-faire involves zero / minimal government intervention on issues such as regulation, taxes and tariffs. Comparison between Laissez-Faire economics and social democracy Origin …
Measuring living standards is important for economic policy. However, in practice, there are several difficulties in measuring living standards and therefore there are several different measures we could use.
The most common measure of living standards is to start with real GDP per Capita.
World Map of GDP per Capita
GDP per Capita. Source: Source: IMF
GDP per capita – GDP measures National Output / National Income. Per capita is the average income per person in the economy. This is a rough guide to living standards because it measures average incomes / the amount produced in an economy. However, income and average output is only a rough guide to living standards. (for example, increased GDP per Capita could be at the cost of increased pollution; in this case, higher GDP could lead to a decline in living standards.
GDP – Purchasing Power Parity PPP
Source: IMF
Another important factor in measuring living standards is GDP measured at Purchasing power parity. This means that the statistics take into account the actual cost of living. For example, some countries may have lower GDP, but the cost of living is much cheaper. PPP adjusts for these different costs of living.
Real GDP per Capita / Hours Worked
A more accurate guide to living standards is to take into account the number of hours worked. If you gain high GPD per capita but have to work a 12 hour day, then this is less desirable than same income for 6 hours work per today. (measuring living standards / hours worked.)
Household expenditure/consumption
Most measures of living standards focus on income. However, income is only a rough guide to the goods and services you can actually buy. Some people may have very high living costs (e.g. rent / council tax / transport costs). Therefore, the quantity of goods and services you can actually buy will give a better guide to living standards than just income. Another issue is that some people may receive benefits in kind. E.g. those on means tested benefits often receive prescriptions and dentist visits for free. Therefore, their living standards are better than their actual income may suggest.
When comparing UK vs US, one feature of the US is that people have to devote a high % of income to health care insurance.
Poverty and Living Standards
An important factor in measuring living standards for the economy is the number of people living below the poverty line.
The poverty line is defined as:
The level of expenditure necessary to buy a minimum level of nutrition and other basic necessities. The World Bank says that the poverty line can vary somewhat from country to country, reflecting different costs of living for taking part in the everyday life of society.
Cinema admissions in UK 1935-2011 In the 1930s, the cinema was one of the main forms of entertainment in the UK. During the war years, and post-war austerity of the 1940s, cinema-going reached a peak at over 1.64 billion admissions in 1946. After this postwar peak, there was a gradual decline in the 1950s, before …
Behavioural economics is a branch of economics that seeks to understand the motivations and reasons behind individual decisions. Rational choice In traditional economics, there is a very basic assumption that individuals are rational utility maximisers. i.e. firms seek to maximise profits; workers seek to maximise income and levels of consumption. (see – rational economic man) …
Over Christmas and the New Year I visited Greece – landing at Athens airport then hiring a car to Kalamata. After writing many articles on the economic troubles of Greece, it was interesting to visit in person. Whilst enjoying a holiday, I was always aware – in the back of my mind – the Greek …
Monopsony occurs when there is one buyer and many sellers.
In the labour market, a monopsony occurs with one employer and many workers wanting to gain employment.
Arguably, monopsony power enables firms to ‘exploit’ workers by setting lower wages and employing fewer workers than in a competitive market.
To visualise monopsony power, we could think of a coal mining town in the nineteenth century. In these towns, the principal source of employment was a coal mine owner (or cotton mill owner). If workers couldn’t get employment in the coal mine, or cotton mill there were few other alternatives. Hence we can understand why workers in the Victorian era were often facing low wages and dreadful conditions.
In this case of monopsony power, the coal mine owner has the ability to be a wage setter. A monopsony can pay wages lower than in a competitive market.
Diagram of Monopsony Exploitation
The marginal cost of employing extra workers increases at a faster rate than the average cost. Because if you increase the wage rate to attract more workers, you have to pay everyone a higher wage.
A monopsony maximises profits by employing a quantity of workers where MR = MC (Q2). This means they only have to pay a wage of W2. This is lower than wage in a competitive market (W1), there are also fewer workers employed.
Readers Questions Could you please explain the comparison between the Keynesianism & monetarism? Keynesianism emphasises the role that fiscal policy can play in stabilising the economy. In particular Keynesian theory suggests that higher government spending in a recession can help enable a quicker economic recovery. Keynesians say it is a mistake to wait for markets …
