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econ434notes11 - History of Economic Doctrines Session 11...

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History of Economic Doctrines Session 11 Classical Macroeconomics Real Output : Classical economic theory from the eras of Richard Cantillon, David Hume and Adam Smith to the present focuses on “real” good and resources, and largely ignores the financial sector of the economy on the intuitive argument that paper documents and their manipulation are primarily a way to keep score ( money as a unit of account ) and facilitate exchange ( money is a medium of exchange ). Thus, real output is constrained by technology and the amounts of resources available. In modern form, real national output [Q] is determined by technology (f) and resources. Real GDP = Q = f(K,L) where real GDP is represented by shmoo—whatever people are willing and able to buy, either directly (consumption) or indirectly (investment in economic capital that ultimately produces consumer goods). Shmoos, like GDP, become whatever people want. Shmoo link The idea that Aggregate Demand might significantly affect output was largely rejected. The only major economic thinker of the classical era who disagreed was Thomas Robert Malthus,
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who theorized that economy-wide “gluts” potentially arise from disparities in the distribution of income. [The poor always spend all their income, but the wealthy may sometimes fail to spend all their income.] Subsequent thinkers of the classical era believed that David Ricardo had successfully rebutted Malthus by arguing that any “excessive” saving would be invested. Classical Perspectives on Money and Finance Nominal Gross Domestic Product [GDP] can be written as PQ, where Q is output and P is the price level. Economists who accepted Ricardo’s logic focused on factors affecting Aggregate
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econ434notes11 - History of Economic Doctrines Session 11...

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