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Home Theories of Economic Growth Classical Model of Economic Growth

 

Classical Model of Economic Growth:

 

Adam Smith and Ricardo both were the classical economists. They had much more similarities in their models of growth. But now a days, there is a customary to present a full fledge classical model which is composed of the ideas given by Smith, Ricardo, J.S. Mill and Malthus etc., regarding economic growth.

 

Features:

 

The classical model has following features:

 

(i) According to classical economists if the amount of labor is assumed to be a specific one which is used to produce certain level of output, the labor will be given the 'subsistence wages'.

 

(ii) The amount of surplus which is earned by the capitalists will be utilized in capital accumulation. The increase in capital accumulation will increase the demand for labor. The wages will increase if the population of the country remains fixed. As wages exceed the subsistence wages the population will increase, following Malthus theory of population.

 

(iii) Because of increase in population the manpower will increase leading to decrease the wages. In this way, they will come back to subsistence wages and producers will be able to reap 'Surplus'.

 

(iv) The 'Surplus' earned by the capitalists will be reploughed by them leading to increase . the demand for labor and the same process will take place which we have mentioned above.

 

(v) This dynamic process will come to an end when 'diminishing return' applies in production. Here the total output produced by the economy gets equalized the wages given over to the labor. In this way, the producers will not be earning any surplus. With this situation, there will be no capital accumulation, no increase in production and no increase in population. It is shown with Fig.

 

Diagram/Figure:

 

 

Here on y-axis the total production and on x-axis the labor has been shown. The OW curve shows the subsistence wages. If level of population is ON, the level of output is OP. Here the per capita wage is NR. Thus, the surplus (profit) is RG. Because of this surplus the process of capital formation starts. As a result, the demand for labor increases leading to increase the wages, as they move to GH. If the population of the country remains constant at ON and the wages exceed the subsistence wages (NG > NR), the population and then the

working force will increase, as it goes to OM. Because of increase in population the 'Surplus' will be recreated and it will be reploughed. In this way, the above mentioned process will be continued till the economy reaches point E, as shown by the arrow movement in the fig. The point E represents a stationary situation where the wages and output become equalized and no surplus would rise. In this way, the expansionary process of capital accumulation and output will come to an end. This would represent 'Doom's Day'. However, they think that if the technical progress takes place in the country the production function will shift upward, as shown by TP2 curve in the Fig. They further say that economic stagnation and stationary state can be postponed, but it cannot be avoided of.

 

Limitations:

 

(i) This model ignored the role which technical progress could play. It is the technical progress which can minimize the role of diminishing returns.

 

(ii) According to 'Iron Law of Wages' the wages can not exceed as well as go below the subsistence level. But, because of changes in industrial structure and economic development the iron law of wages cannot be accorded as the law of wage determination. Moreover, according to classical economists it is the supply of labor which plays an important role in the determination of wages. But it is wrong, the wages are determined both by demand for labor and supply of labor. Furthermore, the classical model did not consider the role played by trade unions in the wage determination.

 

(iii) The development experience of advanced countries has also rejected 'Malthuaian' theory of population. The classical economists following Malthus were of the view that whenever wages exceed the subsistence level the tendency to have more children develops. But it is not necessary, it may happen that rather making marriages people go for the purchase of luxuries when their wages increase.

 

(iv) The classical model fails to incorporate all those complicated factors which influence the economic development of poor countries. In UDCs, there is a big shortage of capital. In addition to capital accumulation, the economic development is also influenced by the culture, civilization, traditions and institutional setup of the people. Such all has not been examined in classical model.

 

Relevant Article:

 

Adam Smith's Model of Economic Growth
Ricardo's Model of Economic Growth
Classical Model of Economic Growth
Marxian Model of Economic Growth
J.E. Meade's Model of Economic Growth
Schumpeter Model of Economic Growth
Secular Stagnation - Hansen's Thesis
Kaldor - Mirrlees Model of Economic Growth
Golden Rule of Economic Growth
Neo-Classical Theory of Economic Growth
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money
 

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