THE CLASSICAL THEORY OF INCOME, OUTPUT AND EMPLOYMENT
THE CLASSICAL THEORY OF INCOME, OUTPUT AND EMPLOYMENT The classical economists believed in the existence of full employment in the economy. According to them, an economy based on laissez-faire principles, is always in the state of equilibrium at full employment. The workers are fully employed at the market wage rate. There is neither underproduction nor overproduction. The entire market system works automatically and it maintains the economy in equilibrium. Its Assumptions: The classical theory of output and employment is based on the following assumptions: There is the existence of full employment. There is a laissez-faire capitalist economy without government interference. It is a closed economy without foreign trade. There is perfect competition in labor and product markets. Labor is homogeneous. Total output of the economy is divided between consumption and investment expenditures. The quantity of money is given and money is only the medium of exchange. Wages, prices and ra...