Keynes Theory

Keynes General Theory of Employment :Keynes ofered this theory in 1936. Keynes explained in this theory that employment depends upon the income. I the standard o national income is higher then rate o employment will also be higher. higher. On the other hand i the leel o national income is lower l ower then the leel o employment will also be lower. lower. !he e"uilibrium leel o income and employment will be that where aggregate demand is e"ual to the aggregate supply. supply.  ASSUMPTION:  ASSUMPTION:

1. It has been assumed that period ta#en is short run. 2. !here is no change in the amount o capital. 3. !here is no change in technology and e$ciency o labour. 4. !here is no oreign trade. 5. !here is no goernment intererence. 6. !he propensity to consume is stable. change in the methods o production. production. 7. !here should be no change 8. !here should be no change in a distribution o wealth. 9. %mployment is the unction o the income. Keynes proed proed this act that supply can not create its own demand& and there is no tendency o the economy towards ull employment. I at any time aggregate demand alls& then unemployment ta#es places and i aggregate demand increases then in'ation ta#es place. (s regards the "uestion o national income and employment determination it is determined by the aggregate supply and aggregate demand.

AGGEGATE !"##$% :(ccording to Keynes Keynes aggregate supply is e"ual to national income at mar#et price. In other words national income is e"ual to the price o goods and serices produced in the country.!he country.!he national income is diided into three parts& consumption saing and taxes. )o (ggregate supply * +ational income * ,onsumption - )aings - !axes or () *  * , - ) - !

In the aboe /igure real national income is measured along O0 axis and expected reenue along a long O. !his 2 degree de gree cure O) shows show s the aggregate agg regate supply supp ly.. It

explains that which minimum reenue should be receied to the producers and they may be able to produce a particular amount o goods and serices and may be able to proide employment to the wor#ers.

AGGEGATE &E'A(& :(ggregate demand is the amount o consumption and amount o inestment expenditure at each leel o income.  !here are two components o aggregate demand. 1. ,onsumption expenditure 4 , 5. . Inestment expenditure 4 I 5. (ggregate demand can be expressed as  * , - I

)ons*mpt+on E,pen+t*re :It depends upon the si7e o national income. I the si7e o national income is greater then greater amount will be spent on consumption. In other words the marginal propensity to consume is grater then the gap between consumption and income is small and the leel o employment will be high. n/estment E,pen+t*re : !he inestment expenditure depends upon the ollowing two actors 8 1. arginal %$ciency o ,apital . ,urrent :ate o Interest I the marginal e$ciency o capital is lower than the rate o interest& the demand or inestment will be low. !he aggregate demand cure rises upward rom let to right.

E00E)TE &E'A(& :(ccording to Keynes the leel o income and employment is determined at a point there aggregate demand cure intersect aggregate supply cure. +ow by the ollowing diagram we can explain it 8

E,planat+on :- In the aboe diagram income is measured along O0;axis and consumption and inestment along O. O) cure shows the aggregate supply 42 degree5 or , - ) line. , - I is the aggregate demand cure. (ggregate demand and supply cures intersect each other at the point .  is the point o efectie demand and O< is the e"uilibrium leel o national income. I we assume that national income is greater than O< in that situation new e"uilibrium point will be /. I total expenditure all short then the aggregate supply& the producer will also reduce the production. /urther income and employment will also reduce and again e"uilibrium will be . CRITICISM :-

1. In the under deeloped countries there are so many other actors which are responsible or unemployment& li#e oer population and lac# o s#ill. 2.