Mercantilism is an economic theory. This theory says that a country success carries on its supply of funds and that the quantity of trade over the whole world is established. Capital is represented with gold, silver and trade value held by the government. A nation can increase its capital through a positive trade balance. This means your exports are larger than your imports. The best way to achieve these two goals is a protectionist role in the economy, through encouraging exports moreover discouraging imports. Therefore, Mercantilist policy in the period regulated trade in ways that subsidized exports therefore to enhance inflows of gold along with silver in addition to limited imports in order to prevent outflows.

A) 
N: the total amount of work used during this period.

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K: the total amount of capital used.

Y: the total amount of finished goods produced during this period It is still the case that L and Y are flows while K is a stock. During a short period of time, we can assume that the amount of capital is constant.

The aggregate production function, is a function that relates N, K and Y. Specifically, we assume that Y is a function of N and K:
Y =( N, K)
B) The increase in labour will result in the increase in total output, but the size output decrease as more labour is employed.

Demand
A firm in a competitive industry will hire workers up to the point where the value of marginal product just equals the cost of the factor. According to the law of Diminishing Marginal Returns, the marginal product of labour declines as more workers are hired.

Supply
Classical assumed that a change in the quantity of labour supplied will take place only if the real wage changes.
Demand for labour is decreasing the function of wage rate.

Supply of labour is increasing function of wage rate.

4) Output and employment will not be affected because, output and employment are supply determined, the level of aggregate demand will have no effect on output.

5)
Perfectly flexible prices and wages.

Perfect information on the part of all market participants about market prices.

Both suppliers and purchases of labour must know the relevant trading prices. This condition requires that when selling and buying labour at a given money wage, both workers and employers know the command over the commodities that will result from such a wage. Essential for the nature of the classical equilibrium theory of employment and output, are the elements of the classical theory Keynes attacked.

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