Potential Output
Our first approach to interpreting the Great Depression focuses on potential output, which is the amount of real gross domestic product (real GDP) an economy produces when the labor market is in equilibrium and capital goods are not lying idle. We start here because this approach corresponds reasonably closely to the economic wisdom of the time. A Decrease in Technology: The Multiple-Markets Perspective Comparative statics is a technique that allows us to understand the effects of a decrease in technology in a particular market, such as the market for new homes. In a comparative statics exercise, we look at what happens to endogenous variables (in this case, production and prices of new homes) when we change an exogenous variable (in this case, technology). A decline in technology shifts the market supply curve leftward: at any given price, the decrease in technology means that the firm can produce less output with its available inputs. The result is shown in part (a) of Figure 7.4 “An Inward Shift in the Market Supply of Houses” for the housing market: output of new homes decreases and the price of new homes increases. Toolkit: Section 16.8 “Comparative Statics” You can review the technique of comparative statics and the definition of endogenous and exogenous variables in the toolkit.
