Classical Economics

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Definition: Classical Economics

Classical economics is a concept in economics which highlights that in an economy where their is freedom of choice or a favorable environment for a business or work, which an individual wants to do as per their interest, it would help the country's economy to perform better.

It refers to the school of economic thought developed by Adam Smith, David Ricardo, John Stuart Mill and Thomas Malthus which states that economies function most efficiently under free trade and open competition. Adam smith’s theory of absolute advantage and David Ricardo’s theory of comparative advantage explained how trade between nations arise out of technological differences, i.e. labour costs. The change in demand will be eventually matched by the change in supply so that the economy is always in equilibrium.

Free trade means unrestricted flow of goods and services between countries without any government intervention. Duties on imports can be imposed only for the government to get revenue and not to protect the local industries.

Advantages and Disadvantages of free trade



  • Optimum allocation of resources
  • Maximization of world output
  • Expansion of consumption possibilities beyond internal production possibilities for the trading countries
  • Lowers the prices of goods & services
  • Widens the size of markets
  • Encourages competition & prevents monopolistic tendencies
  • Results in economic dependence of a country on other countries for some essential commodities
  • Results in lopsided economic development in a country
  • May lead to dumping- sale of a product in foreign market at a price which is lower than the selling price of the product at home
  • May give rise to international monopolies


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