An analysis of the classical theory of macroeconomics

Macroeconomic analyses the behaviour of the whole economic system in totality or entirety. In other words, macroeconomic studies the behaviour of the large aggregates such as total employment, the national product or income, the general price level of the economy. Macroeconomics is a Study of Aggregates: Therefore, macroeconomics is also known as aggregative economics.

An analysis of the classical theory of macroeconomics

The differences between Keynesian theory and classical economy theory affect government policies, among other things. One side believes government should play an active role in controlling the economy, while the other school thinks the economy is better left alone to regulate itself. The implications of both also have consequences for small business owners when trying to make strategic decisions to develop their companies.

Keynesian Economics Keynesian advocates believe capitalism is a good system, but that it sometimes needs help. When times are good, people work, earn money and spend it on things they want.

The spending stimulates the economy, and everything runs smoothly. But when the economy goes downhill, moods change. During tougher times, businesses start closing and firing their employees. People don't have money to spend, and they try to save what little they have left.

When people quit spending, the economy loses its momentum and spirals farther down.

What is 'Classical Economics'?

Keynesian theory says this is exactly when government intervention makes sense. If people aren't spending, then the government has to step in and fill the void. However, there's just one problem: The government doesn't have its own money.

It has to take money away from the people and companies to spend it. Higher taxes for businesses take money away that could otherwise be spent on more investments to grow the company. Classical Economics The theory of classical economics is that free markets will regulate themselves if they are left alone.

Markets will find their own level of equilibrium without interference by people or the government. In a classical economy, everyone is free to pursue their own self-interests in a market that is free and open to all competition.

When people work at jobs making things, they get paid and use these wages to buy other products. In essence, workers create their own demand for goods and services. Role of Government Classical economists do not like government spending, and they especially detest more government debt.

They would prefer a balanced budget because they do not believe the economy benefits from higher government spending. Keynesians are okay with government borrowing, because they are convinced that government spending increases aggregate demand in the economy.

Unemployment and Inflation Keynesian enthusiasts favor government involvement and are more concerned about people having jobs than they are about inflation.

They see the role of workers as using their abilities to contribute for the good of society. Keynesians do not worry about the cost of goods or the purchasing power of the currency.

Classical economists have some concerns about unemployment but are more worried about price inflation. They see inflation as the biggest threat to a strong long-term growth of the economy.

Classical economics - Wikipedia

Classicists believe the economy will always seek a level of full employment. They think unemployment results from government interference in the free market or the existence of a monopoly in an industry. Prices Classical supporters want a market that is free to find its own levels of supply and demand.

They believe that prices should fluctuate based on the wants of consumers. The market will adjust itself to any shortages and surpluses of products. Keynesians believe prices should be more rigid and that government should try to maintain price stability.

They would like to see the government influence people and corporations to keep prices within specified ranges. The Future A key difference between Keynesians and classicists is how to predict and treat the future growth of the economy.

BREAKING DOWN 'Classical Economics'

Keynesians focus on short-term problems. They see these issues as immediate concerns that government must deal with to assure the long-term growth of the economy. Classicists focus more on getting long-term results by letting the free market adjust to short-term problems.

They believe short-term problems are just bumps in the road that the free market will eventually solve for itself. Whether Keynesian or classical economists are correct in their views cannot be determined with certainty. Business owners have to use the actions of politicians and business leaders as signposts to help them make their own decisions about the growth of their companies.Classical economics is a theory of economics, especially directed toward macroeconomics, based on the unrestricted workings of markets and the pursuit of individual self interests.

Classical economics relies on three key assumptions--flexible prices, Say's law, and saving-investment equality--in the analysis of macroeconomics. Classical economics or classical political economy is a school of thought in economics that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century.

Its main thinkers are held to be Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Robert Malthus, and John Stuart Mill.

An analysis of the classical theory of macroeconomics

Classical economics or classical political economy is a school of thought in economics that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. Its main thinkers are held to be Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Robert Malthus, and John Stuart Mill.

Classical economics refers to a body of work on market theories and economic growth that emerged during the 18th and 19th centuries. Jan 19,  · Nonetheless, Classical economics is the jumping off point for understanding all modern macroeconomic theories, since in one way or another they change or relax the assumptions first discussed in the Classical school of thought to derive a more realistic model.

Classical economics looks at value and distribution theory: goods and services are valued at the cost it took to create them (labour theory of value).

Neo-classical economics as instead of believing that prices are determined from the cost to create the good, it focuses on the value consumers and firms place on the good.

The Classical Theory