Thus, the crucial factor in Keynes’ employment income theory is investment. As real national income Y rises, so does the level of aggregate expenditure. The economy is therefore in equilibrium be­cause injections are equal to leakages (withdrawals). Keynesians, however, believe that prices and wages are not so flexible. Thus, Keynesian theory of employment determination is also the theory of income determination. 50. He suggests that aggregate consumption expenditures can be summarized by the equation. Keynes in his eminent work “General Theory of Employment, Interest and Money” not only criticised the classical Say’s law but also propounded a new theory of income and employment. 90)/ (1 – 0.80); i.e., Y = Rs. They distribute their entire after-tax profits as dividends). Note also that each Y is a multiple of the level of autonomous aggregate expenditure, A, as was found in the algebraic determination of the level of equilibrium real GDP. So two points are to be noted in this context: (1) Equilibrium in­come may lie below the potential income and. Since the two graphs have the same scales, we are able to compare desired expenditure and desired saving at any level of national income. The fall in the price level means that the aggregate expenditure curve will not fall all the way to AE 3 but will instead fall only to AE 2. 200 crores more than current output is fulfilled, stocks will fall exactly by the same amount. However, this is not a general result in the sense that it does not always hold. In other words, there will now be unplanned investment in stocks. So stocks which are a form of investment go up due to a rise in saving. Saving is mainly done by households but in­vestment activities are largely carried out by business firms. 5. the general theory of employment re-stated money-wages and prices 6. changes in money-wages o professor pigou's 'theory of unemployment' 7. the employment function 8. the theory of prices short notes suggested by the general theory 9. notes on the trade cycle 10. notes on mercantilism, the usury laws, stamped money and theories of If firms produce output of Rs, 3200 crores, they will not be able to sell the entire amount of it. The explanation of the apparent conflict is the essence of the Keynesian theory of income determi­nation. Keynesian theory of employment depends upon effective demand. 1 Equilibrium level of income and employment is established at a point where AD = AS. If we substitute the first equation into the second one, we immediately find out the equilibrium condition as follows: The implication of this equation is that, in equilib­rium, total desired spending (i.e., C + I) must equal actual income (i.e., actual output). Effective demand results in output. In fact, we have observed that when these two magnitudes are not the same, national income must rise or fall. This shows that total planned expenditure exceeds national income. (a) Planned saving equals Yd — C; and since C = Rs. To the extent households save they reduce their expenditure on consumption goods. The income‐expenditure model considers the relationship between these expenditures and current real national income. Most of the modern economists agree with the concept of Keynes. But to be able to sell more, they must produce more. [S = Yd — C; Yd = Y: S = Y-(Rs. As R. G. Lipsey and Colin Harbury have rightly put it: “Leakages are identified by looking forward to see where income goes, while injections are iden­tified by looking backwards to see where the income came from.” In the simple two-sector economy we are considering now investment is the only injection and saving is the only leakage. The core issue of macroeconomics is the determination of level of income, employment and output. Below the equilibrium level of income, the E line lies above the 45° line (labelled E = Y). 40 to Rs. From Keynes’ model we have arrived at a general result that national income is in equilibrium where aggregate planned expenditure is equal to actual out­put (i.e., actual national income). In­come of the household sector is also Rs. It is quite obvious that in a modern economy using money as a medium of exchange all income is generated by production, i.e., the entire na­tional income is paid out to households, so that the income of the households is exactly equal to the value of output i.e., GNP or GNI. In … Na­tional income reaches equilibrium at point A where desired expenditure is equal to national income (out­put). 2. This shows that planned expenditure is less than income. They regarded unemployment as a temporary phenomenon and assumed that there is always a tendency towards full employment. This point may be illustrated in the following manner. Since both will be fulfilled there will neither be excess demand (and the consequent out­put expansion) nor excess supply (and the consequent output contraction). Privacy Policy3. Thus, a 10% rate of interest is consistent with a Rs. Thus actual total investment would be only Rs. This is known as saving-investment equilibrium,see Table 34.3 below. Share Your Word File Variables 5. KEYNESIAN THEORY OF EMPLOYMENT J.M. (a) Meaning of Effective Demand: Keynes’ theory of employment is based on the principle of effective demand. A study of national income account­ing (estimation) shows that as a matter of definition, the value of the nation’s output or GNP is equal to actual expenditure on that output and to actual factor incomes generated by producing that output. Figure therefore illustrates the Keynesians' rejection of Say's Law, price level flexibility, and the notion of a self‐regulating economy. Share Your PPT File, Adjustments in the Product Market (With Diagram). The stickiness of prices and wages in the downward direction prevents the economy's resources from being fully employed and thereby prevents the economy from returning to the natural level of real GDP. The Classical Vs.Keynesian Models of Income and Employment! Thus we reaffirm the statement that saving is a leakage. 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