Analysis Of The Classical Model Of Economics
ECON 293 Abstract
This is an analysis of two economic models. The first is the Classical Model which had its origins in the 1770s, a time of great change. The Classical Model was considered one of the first system-wide examinations of capitalistic elements. One prevailing theorist was Jean-Baptiste Say, who had liberal views and argued in favor of competition, free trade, and lifting restraints on business. He is best known for Say’s Law, which maintained that supply creates its own demand. (Moore, 2015) The second model is the Keynesian Model which was developed by economist John Maynard Keynes, in an attempt to understand the Great Depression of the 1930s. He theorized that …show more content…
(Miller, 2015). Some of the more remarkable Classical Economists included Adam Smith, J.B. Say, David Ricardo, John Stuart Mill, Thomas Malthus, and AC Pigou. Although they were not always completely unified in their understanding of markets, the majority favored free trade and competition among workers and businesses. They are attributed to the development of theories regarding the concepts of value, price, supply, demand and distribution in capitalist economic systems. Assumptions were founded on the belief that markets self-regulate through “pure competition” and that wages and prices are flexible due to the competitive nature of the economy. (Moore, 2015) Moreover, they ascertained that the economy is always capable of equilibrium, hence it is always capable of achieving a natural level of real GDP due to the belief that supply creates its own demand. Therefore, in the Classical Model, the real GDP doesn’t depend on aggregate demand, the level of the real GDP is completely controlled by the level of …show more content…
(Moore, 2015) In the Keynesian Model consumption spending is a means of promoting growth of the real GDP. Savings therefore, in the short term, may actually decrease the real GDP. But, savings, if invested wisely in dividend-earning stocks, bonds, certificates of deposit, or mutual fund shares, will increase future consumption in the long run.
The demand curve is a downward pointing curve. When there is a shift in demand the entire curve moves left for decline and right for increase. But this only happens in cases that don’t involve price change. If it is related to price the movement in up or down the curve. What happens if total savings increases? According to Keynes, eventually real interest rate falls, and the economy grows faster. So at first overall demand decreases. But, when the economy grows with the demand for goods the demand curve will shift to the right. Savings can be tracked on a curve using a 45-degree reference line. (Moore, 2015)
Impact on Inflation and