Using the Aggregate Demand and Aggregate Supply framework, describe one similarity and one difference between the Great Depression (1929-1933), the Great Recession (2007-2009) and the current COVID-19 recession

All recessions differ in terms of their proximate cause. Several recessions post-World War II in the United States followed monetary-policy tightening by the US Federal Reserve to control rising inflation. The deep recessions of 1973-75 and 1981-82 followed large oil shocks. The global financial crisis of 2007 has cast its long shadow on the economic fortunes of many countries, resulting in what has often been called the ‘Great Recession’. sub-prime segment of the US housing market mutated into a full blown recession by the end of 2007.

Finally, the COVID recession has come on the tail of unprecedented lockdown measures that halted the entire in-person “non-essential” economy. What started as a massive supply-side shock quickly morphed into a demand shortfall, owing to the rapid increase in unemployment, high levels of uncertainty about recovery prospects, online-only shopping, and an increase in personal saving.

Similarities and Differences

World Trade

It is the first time we are seeing a contraction of production around the world since the second world war. Commodity exporters are the worst affected among all . About 90% of world trade that is transported happens through the maritime domain. But as border restrictions are getting strict and tighter, ports getting closed and imports and export entries being restricted, the movement of goods and services is severely restricted. If compared to the Great financial crisis 2008 (GFC), world trade flows were 15% below the previous year levels. In addition, there is a sharp decline in the service sector as well that rely on human interaction due to social distancing measures, and they are indeed very much a product of globalisation. According to the IMF report, this mainly entails the ‘hospitality, transport, retail, and entertainment service sectors’ which ‘account for 26% of GDP and employment of G20 countries.

Impact on the real economy

On the real economy side, the damages have been devastating than the Great Depression due to the pace and the scale of the economic impacts. This time we are facing an exogenous blockade on both the demand and the supply sides of the global economy which are the two fundamental components of capitalism. Due to a subprime mortgage crisis and a loss in the household wealth, the 2007-08 financial crisis had resulted in a plunge in consumer spending, which affected the demand side first. Moreover, even in the event of the 1930s Great Depression, the stock market crash had burst the financial bubble which then drained the consumption and investment spending, leading to a contraction in the aggregate demand. In covid 19 pandemic situation, due to a reduction in travel and transportation, on top of the already dented global industrial activity, commodity prices have also collapsed which has hit producers even more harshly.

Unemployment

Expets predict that unemployment in America ‘to reach 30% by the summer – greater than the Great Depression of the 1930s. About 22 million Americans have already filed for unemployment. In comparison, even when the Great Depression had hit its lowest point by 1933, unemployment in the US still hovered around 20% of the population. Whereas, only about 2.6 million people filed for unemployment in the US in the 2008 Great financial crisis (GFC). In addition, global business confidence is also to take a serious dip and the scars left by reduced investment and bankruptcies may run more extensively through the economy. Therefore, due to the simultaneous demand and supply side shocks, aggravated by the extent of globalisation, the real economy would witness a much precarious global economic downfall of -3% – worse than the GFC (which was about 0.1% decline in 2009) and could be worse than the GD if the pandemic sticks for long.