The fundamental points at issue between the Keynesian and classical Essay - 1

The fundamental points at issue between the Keynesian and classical traditions in UK - Essay Example The Great Depression did last approximately for a decade. It was the period between early 1931 and March 1933 when the depression became great and spread to other nations. The period of Great Depression is mainly recalled for significant unemployment, massive poverty and political turbulence that it caused. For the period of 1931-1940, the rate of unemployment was hovering around 18 percent. During the period of Great Depression net investment was negative and there was a massive fall in consumer price index as well. Between 1929 and 1933, the consumer price index dropped by 25 percent approximately. (Dornbusch and Fischer, 1994) Classical economists did not provide any elaborate explanations for such a huge economic downturn in developed nations like UK, USA and others. However, Keynes has recognized unchecked market movement as the prime reason behind such a great economic downfall. Classical economists mainly focused on the supply side of the economy to search for reason for this depression. However, Keynes held the aggregate demand side of the economy with great importance and recommended counter cyclical fiscal measures to improve aggregate demand. During 1933-1937, some recovery took place in the economy. Real GNP experienced a rapid growth at a rate of almost 9 percent annually. This rapid growth in GNP, however, fell to make a significant fall in the rate of unemployment. In 1938, another economic recession struck the economy and pushed unemployment rate up to 20 percent once again. The Great Depression caused a number of nations to change their political structure as many economists including Keynes considered this severe recession a result of unchecked capitalism. (Dornbusch and Fischer, 1994) There are two major schools of thought in the field of macroeconomics- Keynesian and Classical. Like other developed nations, UK used to follow Classical policy tools to deal with its