Page 55 - DECO402_Macro Economics

Macroeconomic Theory

Notes According to classical economist, if the quantity of currency is double then the price level will become
double. Apposite it, if the quantity of currency is half then price level will become half. So currency
is only a veil its main work is decided the normal price level on which the things and services are
exchange.

Pigou’s Version
Pigou’s provided the last form to classical principle of employment
whose formulated the rule of Say’s in the reference of labour market.
According to Pigou’s, the nature of economic system is within
the free competition that labour market is automatically provide
full employment. Hardness in the structure of wages, provide the
unemployment by interference in the causation of free market
economics. When states are interfered to given the assumptions to
trade union and applied the low wages rules and adopted the labour
monopoly system, then wages increases and unemployment started.
If the interference of states removes and the power of competition
done work freely, then full employment become to increase and
decrease the wages-rate. As Pigou’s did objective, “By the independent
competition…..always one such tendency will be operational in which
the rate of labourur will be so aligned to demand that every person has
employment.” Pigou presented a equations N=qY/W described the all
proposals,. N number is the employed labours in equation q is the half
part of national income earned as wages and salary, Y is the national
income and if we reduced W then N can increased. So the key of full Figure 5.3
employment that currency wages reduced. It cleared in figure 5.3. In
the part (A) of figure S is the supply curve and D is the demand curve. The cut of both curves on E
show the point N of full employment and actual wages W/P on which full employment available. If
o
actual wages kept on high level W/P , then by the demand of labour supply sd increased and N N
o
F
1
labourur is unemployment. When wages reduced and take on the point W/P then unemployment
finished and got the level of full employment. It shows in the part (B) of figure. MPL is the curve
of frontier productivity of labour, which is slant at down as demand curve. Its reason is that when
more labour is apply on employment then the frontier productivity reduced because every labour got
wages according to their frontier productivity so when wages become W/P to W/P then economies
1
got the full employment level N .
F
In the classical model, the change in currency-wages and actual wages are directly related or
proportionate. When currency cut then actual wages are also reduced as same quantity, which
reduced the unemployment and finally economies took full employment. This relation is based on
the perception that prices are proportionate the quantity of currency. The logic is that the decrement
in currency-wages in competition economies reduced the prices
of things and cost of production so the demand increased. To
complete the increasing demand of things more labourur are
keep for employment. When employment increased then total
productivity also increased. Whenever there is no situation of full
employment. When economy is on the level of full employment then
total employment is become constant. So there are relation among
the stock of capital, engineering knowledge and on given sources
total production and the quantity employment. Total production
is the increasing function of wages number. It shows in figure 5.4. Figure 5.4
there Q=f(K,T,N) in which total production Q , function f, capital

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