Economics with Ibu Fenty

Economics – MYP Year 5

Price System in Market Economy

The last unit of our Economics this semester is about Price Mechanism. We talked about the mechanism of how price of goods and services are determined in the market economy system. At the beginning the students were a bit puzzled with this topic, because what they previously understood was that price mechanism was determined by the producers or sellers, little did they know that price determination is the mechanism between the two forces in the market economy system which we called Supply and Demand.

They became more engaged, as they gradually made the connections with the real world. Students started asking questions about the appreciation and depreciation of Rupiahs, and how the price of some goods becomes increasingly expensive during the festive season such as Idul Fitri. It was indeed gratifying to see that they gradually understood and were able to apply the Supply and Demand Concept in real life.

As their summative assessment, I asked them to make a comic book or graphic novel about price mechanism. I appreciated their creativity and their effort to do it. Below is some of their creativity.

---------------------------

Economics – Grade 12 Social A2

One of the perks of being a teacher is to be able to find and to enjoy student’s work.  As we were preparing for the A Level exams, we were reviewing the topic of Government Intervention in the Market Economy. The summative assessment was an argumentative essay on the Great Depression in the US. For this particular unit, I was deeply amazed of what Dominic (Grade 12 Social A2 student) written. Dominic was very savvy in terms of making boring topics into an interesting one. Please enjoy his essay…

Economics: The Great Depression Essay

Dominic Pradana - 12 Social A2

Sekolah Victory Plus 2015/2016

How The Roaring Twenties Turned Into The Whispering Thirties: A Short Essay on The Great Depression

The world has had its fair share of financial crises: the 2010 European sovereign debt crisis, the nightmare that was the 2008 global financial crisis, the 1997 Asian financial crisis, and even another recession ongoing as we speak. None of these crises however, were as brutal and colossal as the Great Depression. We had the misfortune of living through the 2008 financial crisis that certainly left not even economists and top people traumatised, but also commoners like you and I. However, we must consider ourselves lucky as we did not live through The Great Depression, a period of time that surely lived up to its name, when global GDP fell by a staggering 15 percent and unemployment escalated to a devastating 33% in some nations. Although essentially a global phenomenon, the depression was more documented and sound in the United States, a country that prior to the depression was enjoying a period of massive growth and prosperity dubbed “The Roaring Twenties”, in addition to America’s palpable status as an economic and political giant. To this very second, economists could not unanimously pinpoint the exact culprit behind this painful memory, but multiple explanations have provided several suspects.

Ask your average joe or jane to tell you what caused The Great Depression and chances are something about the 1929 Wall Street Crash would come up. Some might also bring up Black Tuesday: October 29, 1929, the day where the picture-perfect image of the Roaring Twenties crashed and burned. This however, is a large misconception. If we’re talking about The Great Depression solely from an American perspective, then that statement could hold somewhat a little more truth. As a global phenomenon however, not even remotely close. It’s much more logical to see the crash as a symptom and as a signal that something terribly wrong was going to happen, and that if the doctors or the policy-makers were truly competent, they could’ve given the economy some antibiotics and the depression could’ve been prevented or at least its scale could’ve been minimised. It could be said that the crash was the final symptom, as indicators and causes of the depression could be seen from the previous decade.

The Roaring Twenties was a period of buoyant and seemingly innocent prosperity. Domestic consumption of consumer product blossomed, which should actually be great for the industry, if only if it weren’t fueled by credit and installments. As this issue begin to crystallise, the first signal of an upcoming depression lit up. Farm prices continue dropping following rapid expansion during WWI to support soldiers which prompted farmers to mechanise their expanded farm, something that was costly and required farmers to go in debt. Another signal came in 1925 when the growth of car manufacturing and residential construction began slowing down. Matters were made much worse in 1919 when commercial bankers begin loaning more for stock markets and real estate investments than for commercial venture. This is where the talks of stock market come to play. At this period of boom, stocks became something trivial and communal as people from all layers of the society come together in this supposedly easy method of getting rich. The activity of stock-buying become so common and glorified that brokers come to villages to help give access to stock-purchasing. There was a huge nudge on people to buy stocks, prompting most to perform margin buying or buying stocks with borrowed money. That was the root of The Great Depression, but didn’t necessarily cause the depression as it could’ve certainly been avoided. Developing from this landscape of thought are two common explanations of The Great Depression: one from Keynesian economics and from Monetarist economics.

It’s important to note that the banks of the 1920s weren’t the large corporations that we know today; they were mostly small, independent institutions and this weak system of banking in America at the time was a contributing cause. A moment of panic that occurred when the Wall Street crashed and burned in 1929 prompted people to rush and take their money but since the workings of a bank is basically just a matter of circulating money, they won’t have enough reserve to satisfy the sudden demand for the money and hence the banks go down one by one like dominoes. The credit become frozen, meaning there are less money in circulation. This brings us to the Monetarist explanation of The Great Depression. Milton Friedman’s Quantity Theory of Money generally says that less money would be deflationary, which was exactly what happened.  For the monetarists, The Great Depression could’ve just been a great recession if it weren’t for policy mistakes especially by the Federal Reserve and the Hoover administration that caused shrinking of the money supply. Hoover’s administration did try to cushion the situation through federal expenditure, though it was far from enough as it required more than what they gave to recover the economy, as federal expenditure was only 3% of the total GDP at the time, nothing compared to the 20% of today.  The Federal Reserve’s failure to save bank by infusing money, or what could be called as the Keynesian Pump Priming also dragged the economy down. The Great Depression wouldn’t have been as depressing if this was the case.

It has been established that a deflation was in full swing at the time. One might say, what damage could a deflation do?  The answer is: a lot. As prices plunge, businesses are forced to cut costs, the easiest way which is to lay off workers, causing the wave of unemployment to start. This gets worse. As people are unemployed, they cannot buy anything, and hence none of the products the businesses are selling actually clears up. Inventory piles up and prices plunged further, but no one could afford to purchase them as businesses couldn’t pay their employees as banks were not lending any money. This reluctance to borrow depresses consumer spending and investment. This brings us to the Keynesian explanation of The Great Depression: a loss of confidence that lead to reduction in consumption and investment spending. If consumption fell because of savings, it would cause rate of interest to fall which would then lead to increased investment spending and demand would remain constant, but this was not the case. Economists at the time depended too greatly on self-correcting mechanisms which didn’t work for a crisis as big as what the world was going through at the time. Again, much like the Monetarist explanation, the fault lies in the failure of policy-makers who could’ve saved the economy, but didn’t.

In his memoir, Herbert Hoover cited “World War I” as the primary cause of the depression. This statement isn’t entirely false, but is indeed quite simplistic. The aftermath of war really did set a landscape for a depression, with piling debts from the other side of the Atlantic. The Versailles treaty entails that Germany was to pay 33 billion to France and The United Kingdom for reparations, 33 billion which Germany certainly didn’t have and had to resort to borrow from US banks. Furthermore, the US was also owed by Britain and France,  prompting the American credit to dry up. Following the war, the German, French, and The United Kingdom’s economy fell too. International trade was particularly weak at the time as few people could manage to purchase international products. World trade was brought to a screeching halt of 50%. At that point, things were looking pretty dismal already. As manufacturers lose consumers, they are forced to shut down and hence starts the domino of unemployment. What made matters worse was Hoover’s infamous Smoot-Hawley tariff, which was supposedly passed to protect American industry. Well Hoover thought wrong because it did the exact opposite as Europe responded in an act of retaliation with their own tariffs, bringing world trade to a new low, and unemployment to a new high. Things were made much worse when the United Kingdom let go of the gold standard while European countries and the USA remained with it as a standard unit of account. Without USA following suit, the financial market froze as the two nations do not have a common medium and unit of account. It also became difficult to perform a Keynesian pump priming that would devalue the currency and perhaps reduce the extent of the depression.

As cliché as it sounds, what comes up must certainly come down, even in the economy. The economy goes around in a cyclical motion. No prosperity is every truly persistent and sustainable. At one point, a decline must certainly happen. What made matters worse during the decline during was an overwhelming domination of credits and margin buying, that combined with the demand-dropping crash of the stock market became a deadly combination. However, even that couldn’t have been so devastating. Just as the richest man in the US at the time, John D. Rockefeller once said, “Throughout my life, depressions come and go, but at the end, it’s going to be alright”. That could’ve been the case, if it weren’t because of several parties. While I don’t expect commoners to see it coming, but I certainly expect the more educated people to do so. At the end, the people to blame for The Great Depression are the policy-makers, the government, the Federal Reserve and such people who brought a disruption in trade, further deflation, and unemployment. The signals were ignored and they were not equipped to face a period of decline, in which if managed responsibly, could’ve spared the lives and the hardships of millions.