Theory of income and employment. Keynesâ€™ Theory of Employment and Income 2023-01-07
Theory of income and employment Rating:
The theory of income and employment is a fundamental aspect of macroeconomics, which is the study of the behavior of an economy as a whole. It explains how changes in certain variables, such as the level of aggregate demand or the level of productivity, can affect the level of income and employment in an economy.
One of the main principles of the theory of income and employment is the idea that the level of income and employment in an economy is determined by the level of aggregate demand. Aggregate demand is the total amount of goods and services that households, businesses, and the government are willing to purchase at a given price level. When aggregate demand increases, it leads to an increase in the level of income and employment in the economy, as businesses will hire more workers to meet the increased demand for their products and services. On the other hand, when aggregate demand decreases, it leads to a decrease in the level of income and employment, as businesses will cut back on production and layoffs may occur.
Another important factor that affects the level of income and employment in an economy is the level of productivity. Productivity refers to the amount of goods and services that can be produced per unit of input, such as labor or capital. When productivity increases, it means that businesses can produce more goods and services with the same amount of input, which can lead to an increase in the level of income and employment. On the other hand, when productivity decreases, it means that businesses will need to use more input to produce the same amount of goods and services, which can lead to a decrease in the level of income and employment.
In addition to aggregate demand and productivity, there are other factors that can affect the level of income and employment in an economy, such as the level of government spending, the level of taxes, and the level of interest rates. For example, when the government increases its spending on infrastructure or other projects, it can stimulate economic activity and lead to an increase in the level of income and employment. Similarly, when the government lowers taxes, it can increase disposable income and lead to an increase in consumer spending, which can also lead to an increase in the level of income and employment. On the other hand, when the government increases taxes or raises interest rates, it can reduce economic activity and lead to a decrease in the level of income and employment.
Overall, the theory of income and employment is a complex and multifaceted concept that plays a central role in the study of macroeconomics. It helps to explain how changes in various economic variables can affect the level of income and employment in an economy and how policymakers can use various tools, such as fiscal and monetary policy, to influence these variables and stabilize the economy.
Keynesian Theory of Income and Employment
The higher the wage rate, the greater the supply of labour. E 2014,2017 Answer: Marginal Propensity to Consume MPC is the ratio of change in consumption to the change in income; It is the slope of the consumption function. In 1933, the United States, quite out of keeping with its constitution, embraced Keynesian economics with the announcement of the "New Deal. We have seen above that an inequality or imbalance between planned expenditure and total output creates disequilibrium in a simple two-sector economy. Since in the short run, aggregate supply does not change, it, therefore, changes in aggregate demand which brings about changes in income and employment.
A portion of such income is spent by households on consumption goods like food, clothing, etc. Effective demand is an Ex-post concept. Underemployment equilibrium causes involuntary unemployment in economy. Since Aggregate Demand remains more than essential demand at full employment level, there is a significant increment in monetary income. Explain with the help of a diagram. The level of employment in an economy is determined at that point where the aggregate supply price equals the aggregate demand price. Either production plans will be fulfilled and expenditure plans unfulfilled or expenditure plan fulfilled and production plan unfulfilled.
This may fill any consumption gap arising from saving. Our observation of economic life, however, is quite different. But since saving and investment decisions are taken by two different groups of people the planned saving of households are unlikely to be equal to the planned investment of business firms. The additional output will then permit business firms to sell more without a further reduction of stocks. It does not change with change in income. ADVERTISEMENTS: Higher lower the level of national output, higher lower is the volume of employment. The level of national income thus achieved is treated as the equilibrium national income.
Keynesian Theory of Income and Employment marginal propensity to save
E Outside Delhi 2013 Answer: Equilibrium is attained when planned expenditure is equal to the planned output in the economy. In fact, income change continues until the two become equal. It is called the break-even point. In other words, effective demand represents the value of the national output and since national output consists of two types of goods—consumption goods and investment goods—the value of national output is equal to the demand for or expenditure on consumption goods plus demand for or expenditure on investment goods. Here any excess supply of money possessed by an individual implies excess demand for goods and vice versa. The approach was developed in the early 20th century, when neoclassical policies seemed to be failing once the great depression hit in the 1920s. Answer: Margin requirement of loan is the minimum security price charged by the commercial bank for granting Question 53.
Economy Class 12: Determination of Income and Employment
Thus, there is an under employment equilibrium. During this period of time, classical economist believed that short run problems where a temporary glitch and that the economy could self regulate through the invisible hand. They distribute their entire after-tax profits as dividends. This shows that total planned expenditure exceeds national income. On the contrary, if people save less and spend more on consumption goods, business firms will find their stock levels falling.
Thus, people will borrow less loans from the banks and the Aggregate Demand will decrease. Plotting this information graphically, we obtain aggregate supply curve. ADVERTISEMENTS: Aggregate Supply: In an economy, all entrepreneurs, taken together, employ a certain total number of labour, who in turn produce a certain quantity of output. Desired expenditure equals actual output the income-expenditure approach. Thus, there is an inconsistency between savings and investment plans. Thus, the prediction is that for national income equilibrium to exist it is necessary for planned ex- ante S to equal planned ex-ante I. Firms will, therefore, not permit their stocks to increase continuously.
The Saving-Investment Approach : The same condition will be obtained if we use the second approach, viz. Thus it is quite obvious that national income is in equilibrium when planned saving equals planned investment. As a result, the purchasing power of the people declines, which decreases the Aggregate Demand in the economy. If they are forced to hold stocks of finished goods due to low demand, a cutback in production is inevitable. So they will be forced to save more than what they planned. According to Keynes, while consumption has an induced, or endogenous, component, investment is an autonomous, or exogenous component of aggregate desired expenditure.
The decisions of individual entrepreneurs will thus lower employment to ON, since they will all wish to avoid losses and will reduce employment to do so. Suggest one fiscal measure to correct deficient demand. Since at this level of national income, planned saving is exactly equal to planned investment, neither expenditure plan of the household, nor production plan of the business firms will be frustrated. The value of MPS can never be negative. Only by stimulating effective demand can a higher level of employment be achieved. What do you understand by APC? Keynesian focused on spending as away to push the economy out of the depression.
Determination of Income and Employment Class 12 Important Extra Questions Economics Chapter 4
Those that follow the policy generally believe in strong fiscal policy, and a central banking system that can help to improve national economies. Thus, incomes must fall below a certain level for the desire to save and the incentive to invest to maintain them. Since Aggregate Demand remains less than essential demand at full employment level, the problem of involuntary unemployment takes place. There is a situation of excess demand of EA. Trend of Investment Expenditure The expected rate of profitability on investment is referred to as the marginal efficiency of capital, and the investment expenditure is governed by it. Thus consumption demand falls short of the total value of production GNP by the amount of saving, which is made up by demand for capital goods i.
There are two reasons for this: 1 Savings and investment are different activities carried out by different groups of people and 2 The motives for savings and investment are diverse. Enhancing Capitalism As the majority of the countries opt for capitalism, these experience unemployment to varying degrees. Here we ignore government expenditure as a component of effective demand. If this equality is achieved at a level less than full employment level of output then the economy will be in a situation of underemployment equilibrium. It is also known as excess demand.