Macroeconomics

Macroeconomics



Macroeconomics

Introduction

The word economics is derived from “oikonomikos” which means skilled household management. Modern economic thought emerged in the 17th and 18th centuries as the western world began its transformation from an agrarian to industrial society. Four major schools of thought have emerged over the years of economic development.

Classical School of Thought

Keynesian School of Thought

Supply Side School of Thought

Monetarist School of Thought

Classical Theory

The Classical Theory is based on the assumption of “Self Equilibration” tendency of the economic forces. The classical view holds that the aggregate supply curve is vertical and is the sole determinant of the level of real output. The down sloping aggregate demand curve is stable and is the sole determinant of the price level.

According to the classical economist the economy will operate at its full employment level of output because (1) Say's law (2) responsive flexible prices and wages. The classical economist believe that supply does not change in response to the change in price level.

As we understand that lower prices would make production less profitable and would cause producer to offer less output and employ fewer workers. The classical response to this view is that the input costs would fall along with products price and level real profits and output unchanged. With perfectly flexible wages there would be no change in real reward and therefore in the production decisions of businesses a change in the price level will not cause the economy to stray from full employment(Phillip 1997).

History Of Classical Theory:

The classical school from 1770 to 1870 mainly included such leading economist as Adam Smith, David Ricardo, J.B Say, John Stuart Mill and Karl Marx. The later Neo-Classical economist list Alfred Marshall (1870—1930) had hardly anything significant to add to the classical theory.

Adam Smith published his “Wealth of Nation” (1776) during the Enlightenment era. The main message of this book “laissez-faire”, the virtue or specialization, free trade & competition it seemed an appropriate tune for that period.

David Ricardo is among the most successful and influential classical economist, with his 1817 treatise he took economics' to a higher degree of theoretical sophistication, Ricardo's theory is very clear as compared to the others, that's why they became the “Classical System”

Jean Baptist Say (1803) wanted to take it back towards 'demand and supply' tradition. By the 1860's the Classical School was in a state of siege.

Beliefs:

Classical economist believe that the government should not intervene to try to correct economic forces as it would only make things worse and the only way to encourage economic growth was to allow free trade and free market. This approach is known as “laissez-faire” which implies an economic system where the government intervenes as little as possible and leaves the private sector to organize most economic activities through free markets. Classical economists were great advocates of laissez-faire approach with minimal government interference, they believed free market were the best organizers of economic activity this kind of approach put total reliance on markets.

Adam Smith's early work was on this theme, he introduced the ...