Economics National Income
Employment mad 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 GAP or output, which is the level of real GAP 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 GAP, self-adjustment mechanisms exist within the market system that ark to bring the economy back to the natural level of real GAP.
The classical doctrine?that the economy is always at or near the natural level of real GAP?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 Says Law * Says Law is the foundation of classical economics. Assumption of full employment s a normal condition of a free market economy is Justified by classical economists by a law known as ‘Says Law of Markets’. It was the theory on the basis of which classical
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