Hello, Assalamualaikum :): Theory of Classic Economy , Modern Economy and Keynes

Macro Economics Principle

Faculty of Economy and Bussiness

University of Singaperbangsa Karawang

Arranged by :

Resha Ariella

1610631030230

1 - AKT - A8

Foreword

First, Praise God Almighty for all the blessings so that this task can be completed. Don't forget i would like to thank Mr. Irvan Yoga Pardistya, SE., MM., Ak.

Hopefully this task can increase knowledge and provide benefits to the readers. Due to lack of knowledge and I am still in the learning process, I believe this task is flawed, therefore I hope any recommendation or criticisms from the readers to make this task better.

Karawang, 10th October 2016

Resha Ariella

Classic Economy

Some of classic economic figures such as Adam Smith (1723-1790), Thomas Robert Malthus (1766-1834), Jean Baptiste Say (1767-1832), David Ricardo (1772-1823), Johan Heinrich von Thünen (1780-1850), Nassau Senior William (1790-1864), Friedrich von Herman, John Stuart Mill (1806-1873) and John Elliot Cairnes (1824-1875) obtained the honor of Karl Marx (1818-1883) on the klasikan to center the economic issues that are considered not go obsolete.

Difference from the Merchantilist and Physiocrats, the classical economic analysis focusing on price theory. The classical trying to solve economic problems with the research demand and supply factors sets the price. John Maynard Keynes (1883-1946) argued that the classical view of economic analysis that focuses on the theory of price, it is necessary to understand the direction of the production equipment perfectly. One of the ideas of the classical greatly affect in the era of globalization the world is thinking about international trade. Thoughts of the classic against the mercantilist thinking that only concerned the inclusion of precious metals and export-oriented by minimizing the import of goods from abroad.

The division of labor is often divided into two meanings, the first is to divide the work into simple so that all workers with a certain level of expertise can do the job. The second sense is the division of labor that divides the work of a double decker production activities into several sections. In the development, the concept of division of labor continues to grow and addressed to job terspesialisasikan activities. Mass production is also inspired by the concept of division of labor, so that production costs are getting cheaper. With the cost of production more efficient, the price offered can be more competitive with other products. Nowadays concept of division of labor has been widely used in almost all industrial sectors. The advantage of division of labor are:

1. Everyone can do the job that fits his talents
2. To enhance the knowledge in the job is so much better
3. The concerned person doing the same job in a sustainable manner so as to avoid losing time, this means more efficient.

According to Adam Smith (1723-1790) on the concept of value is divided into two, namely the use value and exchange value. This raises the paradox of value, ie goods that have a value of usage (use value is very high, such as water and air, but has a very low. and exchange value can be said to have no exchange value. While on the other side of goods whose use value is slightly but can have a high exchange rate, like a diamond.

it was finalized by the teachings of subjective value. In this case the goods that are limited to the value is very subjective and relative according with the willingness to pay of potential customer. As for the production of goods that can be added according to the desire of its exchange value based on the necessary sacrifices. Based on the value of work, distinguished next to "natural price" there is also a "market price". According to the classical flow (Adam Smith) "natural price" will occur when individual citizens have a free choice to make something specific products which he said is more profitable and exchange it if it is considered good by it. This is in line with the views of the Physiocrats.

"The market price" may be different from the "natural price" which will adjust to the situation of supply and demand for goods. Similarly, based on specific considerations, government regulations that may hinder the natural price adjustment with the market price. But anyway, the natural price. will be the reference (guidelines) for setting market price.

After Adam Smith explained about the division of labor, exchange of goods and money as a tool to advance the exchange of goods, hereafter give symptom analysis of value and price. There are three components, namely the price of wages, rents and profits. That work is the cause and size of the price. Adam Smith distinguishes between productive labor and unproductive labor.

Productive labor is work that produces tangible physical goods and unproductive labor is work that does not produce tangible physical goods. Importance save rated as a liability as well as a virtue to multiply bread became a staple religious. In this connection, Paul Leautaud define the notion of storing "l'economie ne c'est pas l'art de vivre." Adam Smith's argument regarding the lease of land is one of the factors determining prices. Furthermore, it also argued that the land lease is the result and not the cause rather than the high price of agricultural produce.

According to this theory of labor demand will depend than wages accumulated funds, than "the which funds are destined for the payment of wages" which savers, and any amount of money paid to that one, by itself less than others.

That is why that help to the poor is adverse fund wages, so also other labor wages. According Nasau Senior William the magnitude of the average wage, depending than a comparison between the amount provided employers for payment of wages, and the number of workers, there are also a similar opinion on Stuart Mill. International trade theory posited by David Ricardo (1772-1823) began with the assumption that traffic is only valid international exchange between the two countries that among them there are no walls of customs, as well as the two countries just circulated gold coins. Ricardo (1772-1823) utilizing marketing laws together with the quantity theory of money to develop the theory of international trade. Although the country has the advantage aboslut, but if done trading will still be beneficial for both countries to trade.

Trade theory has changed the world toward globalization faster. If before country that has an absolute advantage reluctant to trade, thanks to the "law of comparative costs" of Ricardo (1772-1823), England began to re-open its trade with other countries. Thoughts of the classic has encouraged the holding of a free trade agreement between several countries. The theory of comparative advantage has grown into a dynamic comparative advantage which states that comparative advantage can be created. Therefore, technological domination and work hard to be a factor of success of a country. For countries that master the technology will increasingly benefit from free trade, while countries that rely solely on the natural resources will be lost in international competition. Globalization is an inevitable thing. Like it or not, Indonesian must be ready to face it. The government policy is wrong will make Indonesia getting worse. For the technological domination and human resource development should be considered.

Modern Economy

Trade between countries progressing rapidly since the mid-19th century until the beginning of the 20th century, security and peace of the world (before World War I) give a great stock for the rapid development of international trade. Classical theory seems to be able to provide basic as well as an explanation for the continuity of the course of world trade.

It was seen from the efforts of each country participating in it to specialize in the production, as well as seeking to export goods that are most appropriate / advantageous for them. Countries / tropical area is trying to specialize themselves in the production and export of goods originating from agriculture, plantation, and mining, while the countries / areas were, relatively rich in capital, trying to specializes they are in the production and export of industrial goods.

Heckscher-Ohlin argued that conception can be concluded as follows:

A. That international trade / not much different between countries and only a continuation course of inter-regional trade. The difference essentially lies in the distance issue. On this basis, the release Ohlin assumption (derived from classical theory) that in international trade transport costs can be ignored.

B. That goods traded between countries is not based on natural advantages or benefits be developed (natural and acquired advantages of Adam Smith), but based on the proportion and intensity of production factors used to produce the goods.

So to generate something like specific goods wherever the production function is the same, but the proportion of each production factor it can be different (because of a possible replacement / substitution of one factor with other factors within certain limits).

So the Heckscher-Ohlin theory within the limits of the definition states that:

1. a country will produce goods that use factors of production are relatively large (in the sense that the relative factor prices was cheap), so that the price of goods was relatively cheap because production costs are relatively cheap. Because of the Indonesian which has relatively more labor was relatively little capital should produce and export goods that are relatively labor intensive.

2. By prioritizing on production and exports in goods that use factors of production that relatively large,then the relative factor prices would rise a lot. In this case "relatively large" refers to the number of physical interfaces, not the relative prices. Because the relative price of the two kinds of goods that was before the trade goes is different, the country that has the production factor labor is relatively much will tend to increase the production of labor-intensive goods and reduce the production of capital-intensive goods. The country will export barangya labor-intensive and capital-intensive imported goods.

As such international trade will drive up the price of production factor which relatively small. As a result for the country that has a relatively large production factor capital, wages will go down while the price of capital - the interest rate - will go up. So international trade tend to drive the price of production factor are the same, be the same between countries also (equalization of factor price). International trade happens because each party involved may feel benefits from such trade. As such trade is nothing but the continuation or the more advanced forms of exchange that is based on volunteerism each party involved. Of course, the definition of "volunteerism" in international trade must be in quotes, because the reality of volunteerism is actually not always the case, but the force that drives the international trade that it is not always obvious.

Because of the existence of international trade is the increase in relative price of goods produced using the principle of comparative advantage and thus also the factors of production used intensively, it is due to the relative prices of the factors of production may be a change of heading in the same direction but can also be the opposite, anyway, on balance, the two countries can continue to generate two kinds of goods that although the prices of different factors of production in both countries.

International trade because of differences in relative prices between countries. These differences stem from differences in production costs, caused by:

1. The differences in the acquisition of production factors.

2. Differences in the level of technology that determines the intensity of the factors used.

3. Differences in utilization efficiency factors.

4. Foreign exchange rates.

However difference of taste and demand variables can reverse the direction of trade. International trade theory clearly show that the nations would obtain a higher level of life by specializing in goods in which they have a comparative advantage and import goods which have a comparative disadvantage. In general, trade barriers which halt the flow of goods with free will endanger the welfare of a nation.

Theory of Keynes

Keynesian economics: is the name of an economic theory which was taken from John Maynard Keynes, a English economist which lived from 1883 until 1946. He was known as the first person who can explain in simple terms the causes of the Great Depression. Economic theory is based on the hypothesis cash flow cycle, which refers to the idea that the increase in expenditure (consumption) in an economy, will increase revenues which would then encourage more spending and income increased again.

In Keynes's theory, the consumption of which done by one person in the economy will be income for the others in the same economy. Therefore, when a spending the money, he helped increase the income of others. This cycle continues and makes the economy could walk normally. When the Great Depression hit, people naturally react to restrain spending and tend to hoard money. It is based on the theory of Keynes would result in the cessation of the cycle of the velocity of money and then make the economy paralyzed.

Keynes solution for the break through the barriers of this economy is with the intervention of the public sector and government. He argued that the government should intervene in an increase in public spending, either by increasing the money supply or to make purchases of goods and services by the government itself. During the Great Depression, it is nevertheless an unpopular solution. Nevertheless, the government's defense spending proclaimed by President Franklin Delano Roosevelt to help the recovery of the US economy.

The flow of Keynesian Economics, recommend that public sector intervenes in improving the economy in general, where this opinion is contrary to the economic thinking popular at that time - laizes-faire capitalism (theory of capitalism).

Pure capitalism is a theory which opposes interference government and public sector in the economy. This theory believes that the market which free from interference will reach its own equilibrium. Keynes believes that in the economy, the private sector is not fully given the power to manage the economy, because in general, as stated by thinkers genre socialists, the private sector the main aim to make profits for itself and if it is allowed then the economy will be conducive overall.

Therefore, so that the private activities can be guaranteed to be on the right track, then there should be a single authority to control and organize the economy. The Authority is the government's course. Theory of Keynes criticized the government policies are encouraging savings and encourage consumption. Keynes also supports the distribution of wealth in a controlled manner when needed.

Theory of Keynes concluded that there is a pragmatic reason for the the distribution of prosperity: if the poorer segment of society is given some money, they will tend to spend than save it; which then drive economic growth.
The main idea of Keynes's theory is "THE ROLE OF GOVERNMENT" which had been prohibited in Classical Economic Theory.

Analysis of the differences between the Classic Economy and Keynes in many aspects :
Characteristics of Classic Economy :
- 1. The foundation of his theory is based on the law "Say" stating supply will created the demand.
  2. The economy will be under of full employment
  3. The average price is flexible
  4. Every production activity at the same time will have an impact on the increase in output and increase in income owners of the factors of the same value
  5. All income are spent on goods market
  6. There is no need for government intervention
  7. perfect market information and the allocation of economic resources run efficiently and productively.
  
  The Basic Idea of Keynes :
  
  1. Want to build a general theory / (overall theory) / aggregate.
  2. In monetary or money is seen as a medium of exchange, unit of account and store of value.
  3. The interest rate theory
  4. Role of investment determines job opportunities
  5. The psychological aspect, irrationality causing instability. That is the component will be formed by Keynes macroeconomic is packaged in his general theory of employment interest, money from the theory of many criticisms and objections mainly questioned when of full employment can be achieved. That there is approaching of full employment conditions. Then the market mechanism according to Keynes, there is no government interference. In the view of Keynes, a resource to be allocated, homoeconomicus human models
  
  6. There is sugar there are ants (supply create its own human), the supply will reach the demand / law say.
  7. The interest rate mechanism is a mechanism to improve the similarity of savings and investment, to consume more in the future the industry in question is a collection of business units the same / collection of business units that produce similar out
  
  put.
  
  The difference:
  1. Classic believe that the economy is based on market strength will always be towards balance while Keynes believed that the economy there was a time the government intervened to control the economy.
  2. Classic relies on micro problems while Keynes relies on macro issues.
  3. Classic is based on the law "Say" that "supply creates its own demand" while Keynes considers it a mistake because demand usually smaller than the supply. The reason is because some of the revenue received by the people will be saved, and not all of them are consumed. thus, effective demand is usually less than the total of production.
- 4. Opinion of Classic that amount of savings will always be equal to the amount of investment while Keynes dismissed the claims by reason that, motives for saving are not the same as the motive entrepreneurs to invest. Entrepreneurs make investments motivated by a desire to gain maximum profit. While the household sector perform savings driven by motives of precaution.
  5. Classic assume that the position of the balance of resources, including labor resources will be fully utilized. In the event of unemployment, the government did not need to take action / whatever wisdom. While Keynes assumed that in fact the labor market does not work according to the classical view. Wherever workers have some kind of a union that will fight for workers' interests in the reduction of wages.