Economics National Income

Topics: Economics, Capitalism, Classical economics Pages: 1 (262 words) Published: July 22, 2013
  The Classical Theory Of Employment amd output

The fundamental principle of the classical theory is that the economy is self-regulating. Classical economists maintain that the economy is always capable of achieving the natural level of real GDP or output, which is the level of real GDP that is obtained when the economy's resources are fully employed. While circumstances arise from time to time that cause the economy to fall below or to exceed the natural level of real GDP, self-adjustment mechanisms exist within the market system that work to bring the economy back to the natural level of real GDP. The classical doctrine—that the economy is always at or near the natural level of real GDP—is based on two firmly held beliefs: Say's Law and the belief that prices, wages, and interest rates are flexible.

Classical theory of employment and output is based on the following two basic notions:  

1.Say's Law
2.Price-wage flexibility    

                                                                Say’s Law  
  * Say’s Law is the foundation of classical economics.  Assumption of full employment as a normal condition of a free market economy is justified by classical economists by a law known as ‘Say’s Law of Markets’.   * It was the theory on the basis of which classical economists thought that general over-production and general unemployment are not possible.

                                                                      Basic Assumptions of Say’s Law:

  *             (a)   Perfectly competitive market and free exchange economy.   * (b)   Free flow of money incomes.  All the savings must be immediately invested and all the income must be immediately spent.   * (c)  Savings are equal to investment and..
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