Unit 17: The Great Depression,
Golden Age and Global Financial
Crisis
Introduction
Good policies and institutions can promote economic growth and stabilize the economy
during a recession.
Major recessions and slowdowns in growth are due to policy and institutional failure.
Three economic epochs of the last century:
- the Great Depression
- the Golden Age
- the Financial Crisis
The three economic epochs
International comparisons
The three epochs of modern capitalism were worldwide phenomena, but some countries
experienced them differently compared to the US.
, Introduction
The Implication of openness is that economies become linked.
Three distinct dimensions:
- Openness in goods markets
- Openness in financial markets
- Openness in factor markets
Measure of openness
- Imports/GDP
- Exports/GDP
- Average of the ratios of exports and imports to GDP.
The higher the ratio → more open an economy is.
The choice between Domestic goods and Foreign Goods
When goods markets are open, domestic consumers must decide on:
- How much to consume and save
- whether to buy domestic goods or to buy foreign goods
→ effects on domestic output.
Central to the second decision is the price of domestic goods relative to foreign goods (the
real exchange rate) → not directly observable (nominal vs real)
Nominal exchange rates
Nominal exchange rate: It’s the price of one currency in terms of another or relative prices
of currencies.
Quote: Nominal exchange rates between two currencies can be quoted in one of two ways:
- Price of foreign currency in terms of the domestic currency.
Example: Dollar in terms of Rand (US $1 = R15,26)
- Price of domestic currency in terms of the foreign currency.
Example: Rand in terms of Dollars (R1 = US $0.07)
Both definitions refer to the same
1
Definition A=
Definition B
The most important thing is to remain consistent.
*Adopt the second definition.
Golden Age and Global Financial
Crisis
Introduction
Good policies and institutions can promote economic growth and stabilize the economy
during a recession.
Major recessions and slowdowns in growth are due to policy and institutional failure.
Three economic epochs of the last century:
- the Great Depression
- the Golden Age
- the Financial Crisis
The three economic epochs
International comparisons
The three epochs of modern capitalism were worldwide phenomena, but some countries
experienced them differently compared to the US.
, Introduction
The Implication of openness is that economies become linked.
Three distinct dimensions:
- Openness in goods markets
- Openness in financial markets
- Openness in factor markets
Measure of openness
- Imports/GDP
- Exports/GDP
- Average of the ratios of exports and imports to GDP.
The higher the ratio → more open an economy is.
The choice between Domestic goods and Foreign Goods
When goods markets are open, domestic consumers must decide on:
- How much to consume and save
- whether to buy domestic goods or to buy foreign goods
→ effects on domestic output.
Central to the second decision is the price of domestic goods relative to foreign goods (the
real exchange rate) → not directly observable (nominal vs real)
Nominal exchange rates
Nominal exchange rate: It’s the price of one currency in terms of another or relative prices
of currencies.
Quote: Nominal exchange rates between two currencies can be quoted in one of two ways:
- Price of foreign currency in terms of the domestic currency.
Example: Dollar in terms of Rand (US $1 = R15,26)
- Price of domestic currency in terms of the foreign currency.
Example: Rand in terms of Dollars (R1 = US $0.07)
Both definitions refer to the same
1
Definition A=
Definition B
The most important thing is to remain consistent.
*Adopt the second definition.
