Based on the Lesson of the Great Depression, Discuss Why Is Investment so Critical in Determining the Level of Prosperity?

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1920s was the sweetest decade for most of the people in United State, and it had to be credited to the stock market boom and the people could buy the stocks on margin as they thought stock market at that period was infallible investments where they can see their money grow effortlessly and easily. For the Americans, they perceived 1920s as the “Roaring Twenties” as the people had earned a lot of money from the stock market due to the stock price soared in upward trend started in 1924, reached its peak in 1928. Thus the people enjoyed all the luxury goods such as electric appliances, cars, ready-to-wear clothes and even houses. None of them can ever foresee the austerity is coming at the next decade when they were in the time of prosperity in 1920s. Thereby, when the stock market crash of 29 October 1929 occurred, the fact that the stock price plummeted with the hopeless of recovery had overwhelmed the whole country. It led to the people’s urge to sell all the stock immediately, afraid losing all they had. With stock market crash as a major factor, it triggered the Great Depression. However there is public perception that stock market clash of 1929 is equal to the Great Depression. In fact, Great Depression can be attributed to several causes other than stock market crash. According to Kelly (2012), the top five causes of the Great Depression are stock market crash of 1929, bank failures, reduction in purchasing across the board, American economic policy with Europe and drought condition. By here, the terms ‘stock market’, ‘bank’, ‘economic policy’, more or less link to investment when it comes to determining the prosperous ages or recession era, even without people notices. Therefore, it is apparent that investment is critical in determining the level of prosperity, especially after the lesson learnt from Great Depression.

However, what makes investment so critical in determining the level of prosperity? This is an intriguing question. Firstly, what is investment? For general perception, investment is all about stock market, stock price, earning per share, finance and everything that can be related to stocks and shares. Nevertheless, the real definition of investment in economic sense is the purchase of goods that are not consumed today but are used in future to create wealth with the expectation of the value of the particular goods would increase by time (Anon, 2012).Besides that, investment also included capital expenditure and saving other than purchases of bond and stock. Capital expenditure is the funds invested by the firms or corporates to acquire or upgrade physical asset such as property, machines and equipment in order to maintain or even increase the output of production. Before going back to the main question, why do people inject money into investment? The answer is very obvious and simple. People involve themselves in investment, all they are expecting and desiring is profit, no matter it is high or low profit. When there is a high expectation of profit, it will attract more people to invest. When there is more money injected into the market, the economy is stimulated, people gain what they expected: the high profit. It will eventually lead to a higher level of prosperity as people earn more money from the stock market as it happened in 1920s.

On the other hand, the reason of investment becomes so critical in determining the level of prosperity is due to the multiplier effect, or snowball effect. The economy cycle is an endless cycle made up of consumption and production. There is many factors can affect consumption and production, for instance, capital expenditure, consumption expenditure and saving. And most importantly, these factors are interdependent to each other in order to support and move the economy forward. For example, capital expenditure fell led to plunge in consumption expenditure during the early 1930s, caused investment to plummet even more due to multiplier effect. Eventually,...
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