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John Maynard Keynes, (1883-1946), , J.M. Keynes is known as the greatest economist of the 20th century,, , challenged the classical economic law known as Say’s Law which States, “supply creates its own demand”, Ke, , He, , ynes showed that it was aggregate effective
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Introduction, , , , , , , What is Macroeconomics ?, , We have read in Part I that microeconomics is concerned with the analysis of, small individual units of the economy such as individual consumers, individual firms,, individual industries and markets. Through the analysis of the behaviour of these, individual units of the economy microeconomics explains how prices of products and, factors are determined and how resources are allocated among various goods and, services. Further, microeconomics explains how national income is distributed in a, ciety. On the other hand, macroeconomics is concerned with the analysis of the, behaviour of the economic system as a whole. Thus, macroeconomics is a study of, economic aggregates and explains how large aggregates such as total employment,, national product and national income, the general price level of the economy are, determined. Besides, macroeconomics explains how the productive capacity and, national income of the country increase over time. Thus, economic growth is also a, , subject of macroeconomics., , Despite the fact that not enough resources are available to satisfy all human wants,, in a free-market economy they are not always fully utilised. The classical and neoclassical economists believed that there always prevailed full employment of resources., A noted English economist, J.M. Keynes, challenged this viewpoint during the early, nineteen thirties when a severe depression took place in the capitalist economies of the, world. At that time while, on the one hand, there were a large number-of unemployed, workers, on the other, a large number of the factories and capital equipment installed, , in them were lying idle or underutilised. J.M. Keynes in his well known work “ A, General Theory of Employment, Interest and Money”, published in 1936, explained, that this involuntary unemployment of resources was ¢ e, demand. According to him, the levels of employme’, depend on the amount of aggregate demand. A fallin, in employment and national output. As a result, in, emerges. Keynesian analysis greatly improved our, capitalist economy which often causes a lot of in, , , , , , , , , , , , concerned with explaining how employment of, are determined and what factors cause fluctuatio
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I uuwuern sy vagy, , , , , , , , ene 2, , , , ee ero oie, en mainly divided into two, , as be essary to explain Cleary, , It is therefore nec, , , , f economics h, , ct matter 0, , , , , , ee ii) macroeconomics. 1, jee sonomics and (ii) macroe sey tne ee, (i) microecone se two and to desct : ee a, } crinction between thes En ioe : | mt, distinction he term microeconomics has ee a oe on ‘, noted that the (et + eoeconomic theory deals s Hindi ; :, ee small”, Thus, ECE ee eaolds eae Bacal se, A ivi sumin, s s,, such as individual oe 2, : factor markets., product and factor m: erie ae a, , ing that microec ., ak how they are allocated to the production of va Fy, , as given ¢ llocation of resources that determines what goods a be Prodye.,®, goods. It is the alloca roduced. The allocation of resources for the Production P, and how Delta staeaanet economy depends upon the prices of the yay. ¢, particular goods In of the various resources or factors of production. Therefore, , goods and aia of resources is determined, microeconomics proceeds to Analyt, explain how allo f goods and factors are determined. Thus, the theory of Produg, , the relative prices 0 : 1. Thus,, eae and the theory of factor pricing (or the theory of distribution) are the importay, taees of microeconomics. The theory of product pricing explains how the relat, , prices of various products such as cotton cloth, foodgrains, jute, kerosene oil, Vanaspa, ghee are determined. The theory of distribution explains how wages of labour, Tent fo, the use of land, interest for the use of capital and profits for the entrepreneur ag, , determined. :, |, , It is worth mention, en and seeks to exp, , id, , ‘, , Macroeconomics, , ) On the other hand, macroeconomics deals not with individual quantities as such by, with the aggregates ot these quantities; not with individual incomes but with national income, not with individual prices but with general price level; not with individual Outputs but with, the national output. Macro is derived from the Greek word ‘macros’ Meaning ‘large’ a, ne macroeconomics is concerned with the study of economy as a whole and is large, EN ones” studies the behaviour of the large aggregates such as tot, , ; product or income, the general price level of the economy. Therefor,, , wn as aggregative economics. Macroeconomics analysis, , , , between microeconomics and mactt, ; ics deals not with individul
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Introduction, , , , THE ORIGIN OF MACROECONOMICS AND, SANE Mh Aer Alien, , , , , , Classical economists were of the view that there was always full employment im a, free-market economy If there are lapses from the full employment level, then some forces, , d work automatically to restore full employment, Their view was based upon their, always enough expenditure, , ull employment of resources, , woul, faith in Sav s Law of Markets, According to Say’s law, there is, , oraggregate demand to purchase the total output produced with f, , OMG, , Say’s Law is based on, , J.B. Say was the famous French economist of the 19th century, actors of production, , the fact that every production of goods also creates incomes for the fi, equal to the value of goods produced by them. Incomes earned by the factors are spent on, purchasing goods produced. In other words, production of goods creates purchasing power, or demand for itself. Therefore, Say’s law is expressed as “supply creates its own demand”,, that is. the supply of goods produced creates demand for it equal to its own value. As a, result, the problem of general overproduction and unemployment of resources do not arise, In this way. in Say’s law, the possibility of lack of aggregate demand had been ignored. *, , We thus see that, according to Say’s law, aggregate demand for goods will always be, adequate so as to ensure that all resources are fully employed. The factors which participate, in productive activity and earn incomes from it, spend a good part of their incomes on, consumer goods and save some part of them. But, according to classical economists, savings, by the individuals are automatically spent on investment or capital goods. Therefore, since, saving becomes another form of expenditure (that is, investment expenditure), in classical, theory the whole income is spent, partly on consumption and partly on investment. There is, thus no any leakage in the income stream and therefore supply creates its own demand., , Keynesian Revolution, , Towards the close of the twenties and early thirties (1929-33) free-market capitalist, economies experienced severe depression rendering a large number of workers unemployed., For example, in the USA unemployment of labour increased from 3.2 per cent in 1929 to 25, per cent of labour force in 1933 and national income declined by 30 per cent during this, period. This huge unemployment of labour persisted for a long time and full employment, did not get automatically restored. Therefore, it became evident that there was something, wrong with classical economics which believed in self-correcting nature of a free market, economy to eliminate involuntary unemployment, = ;, , If some workers do not want to work at low, employment and therefore will remain unemploy, those workers who do not want to work at lowe!, only voluntarily unemployed. This voluntary ¥, According to the classical thought, it is involuni, a free-market capitalist economy. All those lab, wage rate determined by market forces will ge', , During the period 1929-33 when there wa, , eminent classical economist A.C. Pigou suggt, huge and widespread unemployment prevailing
