Presentation 1

Classical theory ofeconomicsby surbhi raghuwanshi

Definition of classical economics. A school of economic thought, exemplified by Adam Smith's writings in the 18th century, that states that a change in supply will eventually be matched by a change in demand - so that the economy is always moving towards equilibrium..

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List of classical economists..

1.Adam smithThe ideas that became associated with Smith not only became the foundation of the classical school of economics, but also gained him a place in history as the father of economics. His work served as the basis for other lines of inquiry into the economics field, including ideas that built on his work and those that differed.

2, thomas Robert malthus;- In his “Principles of Political

Economy”, Malthus explained how he was against Say’sLaw, by considering

demand as an aggregate. Thus, if wages were to be maintained at a subsistence level, aggregate demand would drop.

3.John stuart mill;-His “Principles of Political Economy”, which is

considered one of the most important contributions made by the Classical school of economics,

4.David ricardo

David Ricardo (18 April 1772 – 11 September 1823) was a British political economist. He was one of the most influential of theclassical economists, along with Thomas Malthus, Adam Smith, and James Mill.[2][3] Perhaps his most important legacy is his theory of comparative advantage, which suggests that a nation should concentrate its resources solely in industries where it is mostinternationally competitive and trade with other countries to obtain products no longer produced nationall

Viewpoints and models…

>>classical economics

•Classical economists assume that:-

_ supply creates its own demand.

{ says law}

_ wages and prices are flexible.

_ savings always equals investment,

Keynesian economics-

John Maynard Keynes

aggregate spending helps determine the level of

macroeconomic activity.

Macroeconomy seeks an equilibrium output level.

• Macroeconomic Equilibrium

. Amount of total planned spending on new goods

and services equals total output in the economy…

. If aggregate spending > current production, then output,

employment, and income will all increase.

inventories-:-

– Stocks of goods on hand.

– Allows for spending to exceed current production.

The consumption and saving function

New classical economics:- Downward-sloping aggregate demand curve was explained through:

• Interest Rate Effect

– Interest rate moves with changes in overall prices.

– An inverse relationship exists between the interest rate and the amount people borrow and spend.

• Wealth Effect

– In order to maintain the same amount of accumulated

wealth, people spend less when prices rise and morewhen prices fall.

• Foreign Trade Effect

– A direct relationship exists between changes in overall

prices in an economy and spending on imports that diverts spending from domestically produced output.