Page 65 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes counted among all the other absurdities of socialism, is that the socialists want to give the
ownership of the industries to the wrong workers!And to do so, they want to destroy the
economic system which gives it to the right workers. They want to give it to the manual
laborers, while capitalism gives it to those who supply the guiding and directing
intelligence in production.
Not surprisingly, the socialists and their fellow travelers, the contemporary "liberals,"
denounce capitalism's giving ownership to the right workers. They denounce it when
they denounce large salaries and stock options for key executives.
Question:
Compare classical theory vis-à-vis exploitation.

Source: www.mises.org

Self Assessment

Fill in the blanks:
14. Technological changes .......................... marginal product of labour.

15. An increase in labour supply leads to a fall in ..........................
16. When the real GDP increases, savings ..........................

3.5 Summary

The classicists believed in the existence of full employment in the economy and a situation
less than full employment was regarded as abnormal necessary to have a special theory of
employment.
Say's law of market states that 'supply creates its own demand'. If goods are produced then
there will automatically be a market for them. This means that there cannot be a general
'overproduction' or 'glut' in an economy that is based on a market system of production
and exchange.
There are three basic features. First, the classical model is called full employment model.
Second, the labour, product and capital markets are interrelated markets. Third, there is
simultaneous equilibrium in all the markets.
Demand for money means holding of money by the people for carrying out transactions.
The people hold a proportion of nominal income as money. Nominal income equals the
price level (P) multiplied by real income (Y). The nominal income thus equals PY.

Given supply of money, the overall price level P is determined at that level at which
people decide to hold the entire money supply. P is determined where money supply
equals demand for money.
In the full employment model, change in supply of money has no real effect on the
economy. The money is neutral. The relationship between the real variables is completely
independent of changes in the nominal variables. This independence is called classical
dichotomy.

In the classical model, all the markets are interlinked and a change in one market brings
changes in all other markets.

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