1)

How do you relate macro-economic during the period of Great Depression?

Macro economy factors that affect any economy can be studied under the following parameters: GNP, unemployment, inflation, inequality of wealth, poverty, human quality of life As is evident from the case we can see that the American economy got heavily aff ected in the various above mentioned parameters. During the entire decade of 192 0s GNP grew at a rate of 4.7% and hence the per capita income by a total of 28%. But still only few segments of the American society were benefited from it. Due to the heavy borrowings, system became less liquid. CPI & WPI fell by 25 and 32 points. Thus the inflation determining parameters fe ll by significant numbers. Farm prices fell from $12 billion to $5 billion. Capi tal investment fell from $16.2 billion to $300 million. Unemployment increased b y 25 %. Purchasing power of money was badly affected. Only one out of several families o wned cars, bathtub, electric power and other amenities. Goods produced by the Am erican business were not consumed in the American market as it did not have the potential customers. Demand did not match the supply in the market. Production w ent beyond the consumption. Further disproportionate tax system had worsened the gap between the rich and po or. High tariffs restricted foreign trade and all the existing markets basically driven by U.S loans were going default. Thus a panorama of entire situation seems to be highly affected in terms of vari ous issues of the macro economy of America. 2) Why market forces failed to create its equilibrium in the great depressi on of 1929 ? (Why supply failed to create its own demand in great depression). Classical Economics Assumptions There are three basic assumptions for Classical Economics. They are: Say's Law: 'Supply creates its own demand'. The law suggests that whatever be th e level of production, it will in turn generate enough demand, without any inter vention from anyone. The aggregate production in an economy generates enough inc ome to purchase all the produced output. Flexible Prices: The prices of everything including products, wages of labor, re nt for land, etc. are flexible enough for both upward and downward movement and there is no intervention by any entity in the economy to resist or change its mo vement. Savings - Investment Equality: Household savings in any economy is equal to the capital investments which happen in an economy. And if it is not so, the flexib le rate of interests move up or down to bring the economy back to equilibrium. In actual economy, these laws doesnt hold true always and the intervention is bro ught in by governments or other entities. Also, it is hard to comprehend human b ehaviour in times of chaos which might bring disequilibrium. Like, in this case, people started taking out their money from the banks because the trust of peopl e decreased in financial institutions. In case of Great Depression, the aggregate demand began falling with the decreas e in investment. It is clear from the case that between 1921-1929 savings reache d a new level. This change in increased savings has to be brought to equilibrium by change in flexible interest rate. When these rates change investments should increase. But, in case of Great Depression, consumption i.e. demand decreased. Now, investments were already on highest level so the aggregate supply didnt decr ease at the same level as demand decreased. There were various other reasons for change in aggregate demand. The crashing of stock market reduced the wealth of very few people but it shook the confidence of many. This in turn reduced the consumption and decreased the demand. This reduction in demand was followed by decrease in wages of labour. This laid to more layoffs. This decreased the consumption more and supply also. But the ch ange in supply was not as much as the change in demand. The revenue of the gover nment also decreased because of decrease in supply and demand. This led to the f iscal policy of increasing taxes. These taxes increased the disparity between po

or and rich and also increased the fiscal deficit. 3. Why cant an agriculture based economy be an economic power (Indian context)? Agriculture in India has a major role in the Indian economy. In 2011 agriculture consisted of 18.1% of the total GDP.Almost 50 % of the Indian working popul ation is engaged in this sector. Yet there are certain significant factors that obstruct the path of Indian economy towards economic powers. Majority of the working population in India is engaged into agriculture for thei r living. Hence slow growth in this sector is a cause of major concern. Low reso urces like poorly maintained irrigation systems, absence of good services and ac cess to the market have affected the growth of agriculture. This sector attracts so many inputs from the government. Government is already g iving several stimuli to the farmers in the form of various policies. Various su bsidies are offered by the government regarding crop loans, tractor loans and ag ricultures loans to the farmers. Despite all the measures taken by the government still the farmers suicide cases have risen in the past. This sector highly needs investment from the private sec tor. New technological inputs can improve the conditions of the farmers. Further providing better markets can take the agriculture sector to new heights. Thus in the view of all the above points agriculture can drive India to an econo mic power if this sector is given main emphasis in various ways.