Production And Unemployment

FIGURE 2

Military Goods

Military Goods

Military Goods

1 \ 1 \ 1 \ 1 \

C

Civilian Goods

At the onset of World War II, the U.S. economy was in a recession with high unemployment. This is shown by point A in panel (a), which is inside the production possibilities frontier. War production eliminated the unemployment as the United States moved onto its PPF at point B with more military goods and more civilian goods. The Soviet Union, by contrast, began the war with fully employed resources. It could increase military production only by sacrificing civilian goods and moving along its PPF from point C to point D.

entered the war in 1941, it was still suffering from the Great Depression—the most serious and long-lasting economic downturn in modern history, which began in 1929 and hit most of the developed world. For reasons you will learn when you study macroeconomics, joining the allied war effort helped end the Depression in the United States and moved our economy from a point like A, inside the PPF, to a point like B, on the frontier. Military production increased, but so did the production of civilian goods. Although there were shortages of some consumer goods, the overall result was a rise in the material well-being of the average U.S. citizen.

In the Soviet Union, things were very different. In the 1930s, the Soviet econ-omy—which was internationally isolated—was able to escape entirely the effects of the depression that plagued the rest of the world. Thus, before the war, it was already operating on or near its PPF, at a point like C.2 Entering the war—which meant an increase in military production—required a movement along its PPF, to a point like D. For the Soviet Union, the drop in civilian production—and the resulting drop in living standards—was the opportunity cost that had to be paid in order to fight the war.3

2 Because its economic system caused major productive inefficiencies, some would argue that the Soviet Union was never actually on or even near its PPF. In Figure 2, however, we take the Soviet economic system as a given. Being on the PPF means the economy is producing the maximum civilian output for any given quantity of military output and for the given Soviet economic system.

3 There is another explanation for the decline in living standards in the Soviet Union, and it, too, can be illustrated with PPFs. Unlike the United States, large parts of the Soviet Union were decimated during World War II, decreasing the land and capital available for production of any kind. Similarly, the Soviet loss of human life was staggering—about 20 times greater than the loss of American lives. These huge decreases in land, labor, and capital shifted the Soviet PPF significantly inward—with fewer resources, civilian production would have to be smaller for any given level of military production.

An economic downturn, such as the Great Depression of the 1930s, does seem to offer a clear-cut free lunch. But eliminating a recession is not entirely costfree. When you study macroeconomics, you will see that while a variety of government policies can help to cure or avoid recessions, these same policies risk creating other problems of their own. Of course, we may feel that it is worth paying the cost to end a recession, but there is, nevertheless, a cost. Once again, a truly free lunch is not so easy to find.

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