In this paper, I will be addressing the different types of macroeconomics, with a focus on the classical and the Keynesian models and the differences that exist between them. I will finish the essay with the new economics models that came after the two early mentioned ones, mainly from the 80's.
Before going to the differences, a brief history of the macroeconomics would help understand what each model emphasizes.
The classical model is the oldest model and has its origin since centuries. Probably one of the major contributors to the classical economics is the economist David Ricardo followed by J-B Say among others. The classical theory represents the economy in the long run with the assumption that prices and wages are flexible.
Classical economists believe that the economy regulates itself towards potential output which is equivalent to real GDP when resources are fully employed, therefore for this model, the government intervention is not needed in case of a recession for example.
The Keynesian model became popular after the great depression in 1929 and named originally after the economist J.M Keynes. Blanchard (2017) argued, "The history of
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2.0., 2012, p. 711). New Keynesians being known for the incorporation of the microeconomics in their macroeconomics field, also have incorporated the main ideas of the monetarist and new classical schools into their formulation of the macroeconomic theory. Blanchard stressed the focus the new Keynesians have for the imperfection in the labor market and argued: "They also shared the belief that much remained to be learned about the nature of imperfections in different markets and about the implications of those imperfections for macroeconomic fluctuations." (Blanchard, 2017, p.
Chapter seven focuses on measuring domestic output and national income. It informs on how GDP is measured, on how to figure out Real GDP and nominal GDP. It also discusses what is considered GDP, and what is not. GDP stand for gross domestic output, which its exact definition according to the textbook, is an output as the dollar value of all final goods produced within the borders of a country, usually in a year. This is a monetary measure.
The charge about the old days of the American economy—the nineteenth century, the “Gilded Age,” the era of the “robber barons”—was that it was always beset by a cycle of boom and bust. Whatever nice runs of expansion and opportunity that did come, they always seemed to be coupled with a pretty cataclysmic depression right around the corner. Boom and bust, boom and bust—this was the necessary pattern of the American economy in its primitive state. In the US, in the modern era, all this was smoothed out.
This cycle continues until 1932, where unemployment peaked at 22.5%. The following year, FDR was elected and he got the US out if the gold standard and began his New Deal. Afterwards, unemployment dropped every year except for 1938(Doc E). Document E was published by Journal of Economic History in 1983. These historians were looking back at the past and were able to acquire information unbiasedly and overall the source of this is reliable.
The Twilight of the Old Consensus, ' ' Gordon provides a trace of the fiscal policy after the end of World War 1 and how it led to the shock experienced during the Great depression. Finally, in ' 'Keynesianism and the Madison Effect, ' ' Gordon argues that after the end of World War 2, economists relied on Keynesian deficit-spending theory to dictate fiscal and monetary policy. These chapters have been used to sum up the
The End of The Great Depression In 1929 the stock-market crash deriving from the Great Depression exposed the vulnerability and weakness of the United States economy. With effects fluctuating in low farm prices and inequitable income distribution to trade barriers, and a surplus of consumer goods due to constricted money supplies, the depression continued to intensify. President Hoover at the time endeavored to resolve the economic issues but failed to do so. In 1932, Franklin Delano Roosevelt (FDR) proposed the “New Deal” while the country had lost faith in Hoover’s abilities.
In 2002, Ben Bernanke, then a member of the Federal Reserve Board of Governors, acknowledged publicly what economists have long believed. The Federal Reserve’s mistakes contributed to the “worst economic disaster in American history” (Bernanke 2002). Bernanke, like other economic historians, characterized the Great Depression as a disaster because of its length, depth, and consequences. The Depression lasted a decade, beginning in 1929 and ending during World War II. Industrial production plummeted.
During the Great Depression “the currency was becoming more valuable every day, rarer and scarcer” (Shlaes 108). The Great Depression was the reason to change and reform government. Even though Shlaes wrote Roosevelt and his New Deal made the Depression stay longer, but in reality to recover from the Great Depression, Roosevelt New Deal helped economy to get back in track. The New Deal made the government to be more involved in people’s life. New Deal used Government as an agent and started to intervene in the economic institution in order to recover from the failure.
Approximately during the 1930s the world as a whole suffered from the great depression. An economic crisis that began in the
Before the depression, the government did not involve its self in the economy too much, which caused America 's future economy to become weak and collapse after the market crashed and many other problems. The fiscal policy was put into order to prevent the economy from collapsing and to stabilize it. The policy was used to plan for the future, which would have still been in a great depression for longer than
Keynesian economists believed that the economy is well controlled by manipulating demand for goods and services. According to Keynesian theory, wages and prices are not flexible. Chapter 12 2. The budget requires the forecast of the economy so as to have a correct knowledge of how much tax revenue it will be needed and how much it will have to spend in order to ensure maximum performance. The budget also requires forecast in order to monitor the spending on different points of the business cycle.
In the early 1930s the labor force in countries that were industrialized saw as much as one forth of its workers unable to find work. Conditions were starting to improve by the mid 1930s, however total recovery did not happen until the end of that decade. This was a very difficult time in United States history and around the world, but it could be said that something good came out of it, central banks throughout the world now try to thwart or moderate recessions. It is unclear whether a change like this would have occurred if not for the
Life Without Supply Based on the reading from the first two weeks, the writers that I have personally read about, and discussed over the past two weeks did an outstanding job with painting an early picture or our country as currently constructed today. The insight and share blunt honesty in their writings is important for us to examine and recognize as a piece of history. During the early years the European writers were able to capture and provide us with a few pertinent informational facts on Early America and how the colonization and settlement played a major role. Early the settlers thought they would be able to utilize the Indians to help them be successful in the new land. "
Keynesian economic theory relies on spending and aggregate demand to define the economic marketplace. Keynesian economists believe the aggregate demand is
Adam Smith, David Ricardo or Karl Marx are known for many as the pioneers of contemporary economies. Their Work and researches were the bases of most of nowadays economic models used by countries around the world. Adam Smith, David Ricardo and their followers were labeled as the classical economists when later on Karl Marx and his followers were labeled as the Marxists. These two economic schools were some of the biggest in history, but yet differed in many ways. Through this paper, we would discuss the says of the Classical and Marxism schools concerning their views on wages, their different opinions about the theory of value, their sides about capital accumulation and finally the different point of view of the schools regarding the diminishing returns.
The theory that Monetary Policy was at fault in causing the Great Depression is one that is explored by Milton Friedman. In his Great Contraction chapter, Friedman sets the tone that it was the policy of monetary contraction during the years of 1927-1930 that caused the economic collapse. Friedman claims that it was the effect of poor policy making by the Federal Reserve that resulted in the depression. He continues to explain that monetary policy acted independently in its causation rather than a combination of forces. Friedman makes his position clear that the contractionary monetary policy imposed by the Federal Reserve caused a decrease in the money supply in the economy.