The classical model was a term coined by Keynes in the 1930s to represent basically all the ideas of economics as they apply to the macroeconomy starting with Adam Smith in the 1700s all the way up to the writings of Arthur Pigou in the 1930s.
The purpose of this chapter is to try to explain the growth in GDP. The models in this chapter are very different from the rest of the models in this book as they use only the production function and factors of production to explain growth.
We have now reached the second part of this book. The first interest rate was a description of the macroeconomic variables and institutions. In the second part, we will analyze how these variables fit together and present models that explain the main macroeconomic variables.
When you borrow money, you usually have to pay a fee for the loan. This fee is often called interest, particularly if the fee is proportional to the amount you borrow. The interest rate is commonly expressed as a percentage of the size of the loan per unit of time, typically per year.
An important macroeconomic variable is the total amount of labor that is used in a certain time period. The amount of labor and the amount of capital are important explanatory variables for production and GDP. Another reason for the importance of the amount of labor is that it is related to the unemployment rate – a macroeconomic variable which is clearly important.