Determinants of the Level of National Income and Employment:
J.M. Keynes, in his book
‘General Theory’ analyzed the consumption behavior of the
community on the basis of human psychology. He propounded a law
which is known as Psychological Law of Consumption.
The classical economists were of the view that the
supply of saving was determined by the rate of interest prevailing in the
country. According to them, the higher the rate of interest, the larger is the
saving and so less is the consumption.
There are a number of
determinants/factors both subjective and objective
which determine the position of consumption function. The factors or causes of
shifts in consumption function are as fallows:
The income not spent on consumption is defined as Saving.
Saving is the act of not consuming all of one’s
current income. Whatever is not consumed out of disposable
income is by definition saving.
The propensity to save schedule
which for the sake of brevity is called the propensity to
save or saving function shows relation between saving
and disposable income at varying levels of income S = F(Y).
Investment is an important
component of national income. It plays an important role in the
determination of equilibrium level of national income and
corresponding level of employment. When the term investment is
used in economics, it refers to the:
Marginal efficiency capital (MEC) is a Keynesian concept.
According to J.M. Keynes, nations output depends on its stock capital. An
increase in the stock of capital increases output. The question
is how much increase in investment raises output? Well, this
depends on the productivity of new capital i.e. on the marginal
efficiency of capital.
The producer's decision as to whether or not, he
should undertake a given investment project is arrived at by comparing marginal
efficiency of capital (MEC) with the market rate of interest (or the cost of
By employment is meant
an engagement of a person in some occupation, business, trade or
profession, etc. The nation of desiring to be employment can be
explained by taking three established facts:
The concept of full employment has been defined differently
by different economists. Lord Beveridge defines full employment as: