Classical theory of economics

What is Macroeconomics?

Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy. With microeconomics, macroeconomics is one of the two most general fields in economics.

Classical Theory of EconomicsA 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.

History of Classical Theory of Economics

Classical economics can trace its roots to Adam Smith in 1776. In The Wealth of Nations Adam Smith presented a comprehensive analysis of economic phenomena based on the notions of free markets and actions guided by individual self interests in a laissez faire environment.

Three Key Assumptions

Flexible Prices.

Say's Law.

Saving-Investment Equality.

A Perfect World…

Efficiency.

Full Employment.

Say's Law 

According to Say's Law, when an economy produces a certain level of real GDP, it also generates the income needed to purchase that level of real GDP. In other words, the economy is always capable of demanding all of the output that its workers and firms choose to produce. Hence, the economy is always capable of achieving the natural level of real GDP.

Contrast between Classical and Keynesian Economics

Unemployment.

Says Law of Market.

Equality between Saving and Investment.

Money and Prices.

Contd…

Demand for Money.

Short and Long Run Analysis.

Role of State in Achieving High Level of Income and Employment.

General versus Special Theory