Overview
This lecture covers the impact of World War II on U.S. investment and labor, focusing on shifts in investment, fiscal and monetary policy, and changes in women's labor force participation.
Investment During World War II
- Real GDP formula: Y = C + I + G + X - M (output = consumption + investment + gov. spending + exports - imports).
- Consumption declined by 30% and investment by 74% during WWII.
- Government production of military goods is counted under government spending (G), not investment (I).
- Investment measures firm spending on capital like tools and machinery, excluding government purchases.
- Crowding out: Government war deficits reduced saving supply, causing investment to fall.
- Federal Reserve's expansionary monetary policy partly offset saving supply reduction.
- Main reason for plummeting investment: investment demand shifted left, not just saving supply.
- Factors lowering investment demand: higher corporate taxes, price ceilings, shortages of consumer goods inputs, and wartime uncertainty.
- Corporate tax increases reduced firm profitability and willingness to borrow for investment.
- Price ceilings limited price increases, harming business profits.
- Shortages in inputs hindered consumer goods production.
- Uncertainty about the future made firms hesitant to invest.
- Decreased investment demand lowered both investment and interest rates, while deficit-financed crowding out raised interest rates.
Labor and Women in the Workforce
- Labor force participation rate for women rose significantly during WWII, as many men went overseas.
- Both employment and unemployment rates for women increased—unusual in economic history.
- More women wanted to work or contribute to the war effort but could not always find jobs, raising female unemployment.
- Labor force includes both employed and unemployed individuals actively seeking work.
- The number of women in the labor force grew due to both increased employment and more women seeking jobs.
Key Terms & Definitions
- Investment (I) — Firms' expenditures on capital goods like machinery and tools.
- Crowding out — When government borrowing reduces the amount of funds available for private investment.
- Investment Demand Curve — Shows firms’ willingness to invest at different interest rates; shifts left when investment falls.
- Labor Force — All people employed or actively seeking work.
Action Items / Next Steps
- Read the remainder of Chapter 12 on WWII labor policies (Selective Service Act, Smith-Connally Act, executive orders).
- Remember the labor force formula for future questions and applications.