What are the characteristics of the classical economy. explain the theories in terms of: price, value,...

What are the characteristics of the classical economy. explain the theories in terms of: price, value, currency, growth, distribution. explain the theories of classical economics and Adam Smith.

Expert Solution

Characteristics of Classical economy:

The classical system of economics is the compilation of theories of various classical economists such as Adam Smith, Ricardo etc. formulated in various years. The characteristics of classical economy are:

i. There always exists full employment in the economy. This was the major assumption of Adam Smith. He said that the economy will always operate at the full employment level in the economy.

ii. The wages and prices are flexible in the economy: Adam Smith said that if there are fluctuations in the economy in the level of demand and supply forces, the wages and prices will adjust in the market to restore the equilibrium in the economy (equilibrium is attained where demand is equal to supply). For example, if the demand of the commodity decreases due to factors other than the price level, the price of the commodity will decline and it will intersect the supply curve and intersect it at the lower price level.

Due to complete flexibility of wages and prices, there always exists the situation of full employment in the economy.

iii. Quantity theory of money: Quantity theory of money says that the price level in the economy is proportional to the level of money supply in the economy. Thus, the price level is determined in the classical money market.

Classicals only highlighted the role of medium of exchange function of money in this theory.

iv. Classical commodity market: In classical commodith market, the saving and investment curves intersect to determine the equilibrium level of rate of interest. Saving is said to be the positive function of rate of interest and investment is said to be the negative function of rate of interest.

v. Classical labor market: In this market, the demand and supply curves of labor are function of real wage rate and it is determined in the market at the equilibrium level. Workers and producers do not have money illusion. The supply curve of labor is the upward sloping function of real wage rate and demand for labor is the downward function of real wage rate.

Rahul Sunny answered 6 months ago

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