Question

Explain how did Keynes school change the trade adjustment.

Answer 1

John Maynard Keynes is the Einstein of economics. He is the face of a field; he is without a doubt the most famous economist there ever was and ever is and possibly ever will be. To assess his economic policies and ideas and there effects and relevance on and to the Economies of the world today we must first try to define Keynesian economics without spreading into tomes of paper and devoting copious amounts of time.

Two elements of Keynes’s legacy seem secure. First, Keynes invented macroeconomics – the theory of output as a whole. He called his theory “general” to distinguish it from the pre-Keynesian theory, which assumed a unique level of output – full employment.

Keynesian economics is an economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression. Keynes advocated increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the depression. Subsequently, Keynesian economics was used to refer to the concept that optimal economic performance could be achieved -– and economic slumps prevented – by influencing aggregate demand through activist stabilization and economic intervention policies by the government. Keynesian economics is considered a "demand-side" theory that focuses on changes in the economy over the short run.

In classical economy theory, it is assumed that output and prices will eventually return to a state of equilibrium, but the Great Depression seemed to counter this assumption. Output was low and unemployment remained high during this time. The Great Depression inspired Keynes to think differently about the nature of the economy. From these theories, he established real-world applications that could have implications for a society in economic crisis.

Keynes rejected the idea that the economy would return to a natural state of equilibrium. Instead, he envisaged economies as being constantly in flux, both contracting and expanding. This natural cycle is referred to as boom and bust. In response to this, Keynes advocated a countercyclical fiscal policy in which, during the boom periods, the government ought to increase taxes or cut spending, and during periods of economic woe, the government should undertake deficit spending.