BUSINESS ECONOMICS (MACRO) (1) TRADE CYCLE

7
CLASSICALTHEORIES OF
EMPLOYMENT
7.1 Introduction :

The term classical economics was applied to a school of economic thought that begin with the
writing of “Wealth of nations” by Adam smith in 1776.By classical or classical economist means ,
traditional or orthodox principles of economic theory which have been handed down from the
generations since the time of Ricardo. These principles have been elaborated, refined and
modified from time to time by succeeding economists, up till now basic core of classical theory
more or less the same. These principles represent by themselves a well–defined body of
economic thought. The various economists who have refined and developed these principles are
called as classical economist. We can take name of Adam Smith, David Recardo, J.B. Say, Pigou,
Fisher, John Stuvart Mill are most famous classical economists.

7.2 CLASSICAL THEORY AND FULL EMPLOYMENT

The classical theory of employment and income, full employment is normal feature of capitalist
economy and any lapses from full employment are considered to be abnormal. As per theory
there is always a tendency towards full employment. Classical economists used to term full
employment to signify a situation in which ordinarily all those people who are willing to work at
the prevailing wage-rate get work.

“Full employment is a situation in which all those who wants to work at the existing rate of wage
get work without any difficulty.” Lerner

There is no “involuntary unemployment” in full employment situation, but according to them,

even under full employment situation, following kinds of unemployment could be possible in any
economy.

1. Voluntary unemployment : When labourers are not ready to work at the existing rate of
wages or not willing to work when there is work, then such an unemployment is called
Voluntary unemployment.
BUSINESS ECONOMICS (MACRO) (2) TRADE CYCLE

2. Frictional unemployment: This type of unemployment arises on account of raw-material,

immobility of labour, few opportunities of special kind of employment and wear and tear
of machines etc.
3. Seasonal unemployment: Change in season, fashion and taste causes this types of
unemployment e g closing down of ice factories during winter season.
4. Structural unemployment: It is result of Structural changes in the economy, e.g. change in
country’s export trade.
5. 5. Technical unemployment : It is caused by change in the technique of production.

7.3 ASSUMPTIONS OF THE CLASSICAL THEORY OF EMPLOYMENT:

Classical theory is based on the following assumptions

1. Full employment: There is existence of full employment even without inflation.

2. Laissez- faire 1 : There is closed Laissez- faire capitalist economy.(1. a policy that allows
businesses to operate with very little interference from the government)
3. Free price system : There is free market price system
4. Perfection competition; There is perfect competition in commodity as well as labour
market. All units of labour are homogenous.
5. Flexibility- Money and wages are flexible.
6. Co-ordination: There is close co-ordination between money real wages and real wages.
7. No Deficiency: since supply creates its own demand, there can never be deficiency in
demand.
8. Consumption and investment: Total output of the economy is divided between
Consumption and investment expenditure.
9. Constant technology: capital and technology are given in short- run.
10. Money: money is only medium of exchange.
11. Equality between saving and investment: Classical theory assumes that saving are
automatically invested. Equality between saving and investment is brought about by
change in the rate of interest.

7.4 SAY’S LAW OF MARKETS

J.B.Say (1767-1822), a French economist, propounded this law in his book entitled” Traite
d’Economique Politique” which later became a very popular treatise on political economy in
France. Say tells that general over-production and general unemployment are impossible in
capitalist economy. He says that”supply creates its own demand”
BUSINESS ECONOMICS (MACRO) (3) TRADE CYCLE

“ It is production which creates markets for goods.” Say explained that , the main source of
demand is the flow of factor incomes generated from the main source itself. Every output,
brought into existence , injects an equivalent amount of purchasing power in circulation
which ultimately leads to its sale-thus there is no overproduction or surplus. The process of
manufacture a photocopy machine also brings into an equivalent amount of purchasing
power in the form of wages, profits etc, which would ultimately lead to its purchase.

Suppose photocopy machine is manufactured and can be obtained in 10 lakhs. The cost of
raw material is 4,00,000Rs , 4,00,000Rs is paid to the workers as wages, Rs 1,00,000are paid
to other persons as rent, interest etc and remaining amount 1,00,000 Rs is the entrepreneur’s
profit. This income of 10 lakh rupees will be an additional purchasing power used to purchase
goods from the market. Thus supply is always equal to demand.

S=D This can be seen in the form of a chart

Production of goods worth This creates factor income

Rs10 lakh worth of Rs10 lakh

Supply of goods worth This income of Rs 1lakh

Rs 10 lakh becomes the source of
demand for goods worth 10
lakh
Essence of Say’s Law that there can be no overproduction of any commodity at any time .If
general overproduction is impossible, there is not general unemployment also. As full
employment is assumed by the classical economists. They accepted certain amount of
“frictional unemployment” in even full employment society, but they deny the existence of
involuntary unemployment .Absence of involuntary unemployment is basic idea of classicist.
If such kind of unemployment exists, that is due to the” interferences” with the free working of
economic system. As governments intervene to assure minimum wage or labour union
interrupts for increasing wage rate. If these interferences are stopped,
Unemployment would disappear; everyone who is willing to work will be able to find a job.
Prof.Pigou argues that removal of interferences and existences of free competition would
force the wages down until it is profitable for employer to engage everyone who wants to work
.Thus the classicist believe that involuntary unemployment is due to wage rigidity. Thus
cure of unemployment ,as per classicist free working of economy by r emoving all ”
BUSINESS ECONOMICS (MACRO) (4) TRADE CYCLE
interferences” Whether by government or by the union. Here we can summarise important
implications of Say’s Law :
1.There is automatic adjustment of every element with the working of the economy. The
government should not interfere with the working of the economic system.
2. General overproduction is impossible.
3. General unemployment is impossible .If some unemployment is there that shall be
temporary and shall automatically disappear in due course of time.
4. The employment of unemployed resources shall pay its own way. It is clear That when
unemployed resources are put to work, they certainly help in increasing the volume of goods
and services in the community. As such, The size of, the size of the national income
increases, and it becomes possible to remunerate the newly employed factors out of it.
5. The economic system has built-in flexibility. It is automatic. As such government should not
interfere with the working of the economic system and leave prices wages and interest rates
free to adjust themselves to the changing situations.
THE CLASSICAL MODEL OF EMPLOYMENT :
The classical economists have extended their model to three markets
Labour Market
Money market
Commodity market

Labour Market

The feature of classical labour market analysis assume that market works well, firm and
individual worker optimize. There are no barriers to the adjustment of money wages.
.

W/P 1
Real wages

W/P 0
DL=f (MPP L)
W/P 2

O N1 N0 N2 X
Employment

In the labour market, equilibrium level of employment is attained where the

demand for labour (DL) is equal to the supply of the labour(SL). The demand for labour
BUSINESS
is ECONOMICS (MACRO)and
a derived demand it depends on(5)its marginal productivity under perfect
TRADE CYCLE

competitions. So long as the cost of hiring Additional worker is less than the revenue
obtained, employer will employ additional worker. The cost of labour is expressed in
terms of money wages(W) or real wages(W/P) i.e wage divided by the general price
level. Again the revenue obtained from labour can be expressed in terms of marginal
physical product of labour (MPPL) multiplied by the general price level.
Symbolically, money wages can be express as follows:
W=P.MPPL
Where MPPL is the marginal physical product of labour, and P is the general price level.
The same idea can be explained in terms of real wages as follows:
W/p= P.MPPL/p = MPPL
Where W/P is the real wage, which is equal to the marginal physical product of labour. As
employers employ additional labourers, MPP of labourers decreases. The demand for labour is a
function of real wages. Large numbers of labourers are demanded at low wages and vice-versa

W/P 1
Real wages

W/P 0
DL=f (MPP L)
W/P 2

O N1 N0 N2 X
Employment

Figure 7.1
In figure 7.1 at W/P0 real wage rate, the demand for labour is ON 0 .As the real wage
rises to W/P1,the demand for labour declines to ON1. and vice-versa.
The supply of labour is also function of real wages. Large numbers of labourers will be
supplied at higher wages and vice-versa.

In figure 7.2 at W/P1, real wage rate the supply of labour is ON1.As the real wage rate
rises to W/P2 the supply of labour also increases to ON2..
BUSINESS
Y ECONOMICS (MACRO) (6) TRADE CYCLE
SL=f {W/P}

W/P 2
Real wages

W/P 1

O N1 N2 X
Employment

Figure 7.2

EQUILIBRIUM IN THE LABOUR MARKET( PIGOU’S VERSION)

Pigou formulated Say’s law in terms of Labour market. He believed that under free
competition the tendency of the economic system is to automatically provide full
employment in the labour market.
“With perfectly free competition..........there will always to be at work a strong tendency for
wage rates to be so related to demand that everybody is employed” Pigou

The equation N=qY/W explains the entire proposition. N is the number of works employed, q
is the fraction of income earned as wages, y is the national income and W is the money
wage .N can be increased by reduction in W. This is explained in Figure 7.3.In panel a
supply curve of labour S intersects the demand curve for labour D at point E. This
represents the point of full employment NF and the corresponding real wages W/P. If real
wage is maintained at higher level W/P1 , supply of labour exceeds its demand by Sd,
resulting into N0 - NF unemployment. If the wage is reduced to W/P, unemployment
disappears, In panel B MPL is the marginal labour product curve which slopes downwards
as more labour is employed, since every worker gets wages equal to his marginal product,
the full employment level NF is reached when the wage rate falls from W/P1 to W/P. Thus ,
the key to full employment is a reduction in money wages. In the classical theory of
employment , changes in money wages and real wages are directly related and
proportional. Total output is increasing function of the number of workers.
BUSINESS ECONOMICS (MACRO) (7) TRADE CYCLE

Pigou’s Version
Unemployment Fall in wage Increased demand Equilibrium
( a surplus labour) for labour restored in full employment

SL=f {W/P}
W/P 1
Real wages

E
W/P

Q
DL=f (MPPL)

O N0 NF X

Y
Real wages

W/P 1

W/P

MPL

O N0 NF
X
Employment
(b)

Figure 7.3
So As per pigou unemployment results from rigidity in the wage structure and interference in
the working of the free market economy. Again If all the Government interference are
removed and forces of competition are allowed to work freely, the wages rates lead to full
employment.
CLASSICAL THEORY OF INCOME AND EMPLOYMENT: MONEY ,PRICES AND
BUSINESS ECONOMICS
INFLATION (MACRO)
FISHER VERSION (8) TRADE CYCLE

We can examine the classical theory of employment when money is introduced in the

system, The quantity of money according to classical theory, determines only the price level
of output and in no way effect the real magnitudes of saving and investment, again since
quantity of money determines the price level of output, it also affects the real wage rate, that
is the ratio of the money wages and the price level W/P.
First we discuss how in classical theory (fisher theory) price level in the economy
determined. Classical economist believed in the quantity theory of money. According to
Fisher’s quantity theory of money it is the supply of money that determines the price level in
the an economy.

We can give Fisher’s equation of exchange

MV=PT
Or P=MV/T
Where M= Quantity of money
V = income velocity of circulation of money
T= Level of aggregate output (real income)
P= price level of goods and services
Income velocity of money is defined as the number of times a unit of money is used for
purchase of final goods and services in a period, say during a year. In classical theory
velocity of money and level of output remain constant. As V and T remaining constant, price
level P is determined by the supply of money M and increases in money supply bring about
rise in price level in the same proportion. Here MV denotes supply of money and PT is
demand for money.
M P
In other word increase in money supply would lead to inflation. The relationship between the
quantity of money, total output and price level is shown in figure 7.4
BUSINESS ECONOMICS (MACRO) (9) TRADE CYCLE
Y
M1V1

MV
W/P 1
m m2
Output

M1V1
Q

MV

P P1
O (a)
X

Y W/P
Money wages

W2

W1

O P1 P2
X
Price level
(b)

Figure 7.4 relationship between money, Output and price Level.

In figure 7.4 (a) price level is shown in the horizontal axis and the total output on the vertical
axis. MV curve is a rectangular hyperbola. Given output level OQ, there would be only one
price level op consistent with the quantity of money as shown by point m on the MV curve.
If the quantity of money increases, MV curve will shift to the right as M1V1 curve. Since the
output OQ is given, the price level would rise from OP to OP1 .The rise in the price level is
exactly proportional to rise in the quantity of money. In figure 7.4(b) W/P is the real wage
line. When the price is OP the money wage is OW. When the price level rises to OP1 the
money wages also rises to OW1. The wage-price combination OW1 = OP1 is consistent with
the full employment real wage level of W/P of fig 7.3(a).

COMMODITY MARKET(determination of income and employment in an economy with

saving and Investment)
Commodity market deals with the sale and purchase of goods. Equilibrium in the commodity
market is attained when the aggregate demand for goods equals the aggregate supply or
the investment equal to saving (I=S).The investment exceeds saving [I>S],the level of
employment, income and output will have a tendency to expand. Conversely, if the
aggregate demand for goods falls short of the aggregate supply or the investment falls short
of the aggregate supply or investment falls short of savings [I<S], the level of employment,
income and output will show a tendency to decline. According to classical economists, the
BUSINESS ECONOMICS
equality between(MACRO)
saving and investment (10) TRADE
is obtained through variation in the rate CYCLE
of interest.
Thus saving is regarded as an increasing function of the interest rate and investment as a
decreasing function of the rate of interest.

I1
Y

I S
E2
Rate of Interest

S
I

O A B C
Savings and Investment

[figure 7.5]
In figure 7.5, II is investment curve which slopes downwards to the right. The downward
slope of the II curve shows inverse relationship between the rate of interest and investment.
SS is the saving curve. The upward slope of the SS curve shows a positive relationship
between rate of interest and saving. The two curves intersect at E where the rate of interest
is Or and both saving and investment are equal to OA.
If there is an increase in investment, the investment curve shifts to the right
as I1 I1 curve and at the rate of interest.Or1, investment OC is greater than OA saving. IN
order to cater to the needs of the investors, the saves will raise the rate of interest until it
reaches the new equilibrium level. This is shown to rise to Or1 in the figure. At this interest
rate, the saving curves SS intersects the investment curve I1 I1 at E1. Consequently, both
saving and investment are equal to OB.

Determination of employment and real output

A central relationship in the classical model is the aggregate production function. The
production function, which is based on the technology of individual firm, is a relationship
between the level of output and the level of factor of inputs: the production function shows
the resulting level of output, and can be written as:
Y=f(K,N)

Where Y is real output, k is the stock of capital (plant and equipment), and N the quantity of
the homogenous labour input. For the short run, stock of capital, state of technology, and
population are assume to be constant.
BUSINESS ECONOMICS
Y (MACRO) (11) TRADE CYCLE
Output

O N0 X
Employment

Figure 7.6
In the figure(7.6) the total output OQ correspondents to the full employment level N0

(fig.7.3). The classical economists believed that under competitive conditions, full
employment will be maintained without inflation. An important feature of the classical model
is that factors operating on the supply side of the market determine the level of employment
and output. It is the labour which is the function of real wages that plays an important role in
the determination of the labour market equilibrium and employment, and employment
determines the level of output. In short we can say the short run classical theory of income
and employment can be explained through the following three stages:
1.Determination of income and employment when there is no saving and investment :
It is the intersection point of demand of labour and supply of labour,employment and output
will be decided without including concept of saving and investment as per shown in figure
7.1,7.1,7.3 and 7.6.
2.Determination of income and employment with saving and investment :As per shown
in figure 7.5 equilibrium in the commodity market with saving and investment.
3. Determination of income and employment with money and price level: as shown in
figure 7.4 equilibrium of income and employment with introduction of money and inflation.

KEYNES CRITICISM OF THE CLASSICAL THEORY.

The classical theory of employment was not accepted by the Keynes on several grounds.
The main points of criticism of the classical theory are as follows;

1. Unrealistic Assumption of Full employment condition:

Keynes foremost attack was on the classical assumption to full employment. He regarded it
As unrealistic. He considered that a capitalist economy would generally be a situation of
underemployment equilibrium. He regarded it as unrealistic millions of worker are prepared
to work at the current wage rate , and even below it, but they do not find work. Thus ,the
existence of involuntary unemployment in an economy proves that underemployment
equilibrium is a normal situation .
2. Repudiation of Say’s Law :
According to Say’s Law an increase in employment increases income ,the whole of
BUSINESSwhich
ECONOMICS (MACRO)
is automatically spent either on(12) TRADE As
consumer goods or on investment goods. CYCLE
per
Keynes, a part of increased income is spent on consumer goods and other is saved .
But there is no guarantee that the saved part of income will be spent on investment
goods. Consequently if investment does not increase when employment increases ,
there will appear deficiency of demand. This in turn lead to general unemployment.
3. Rejection of Pigou’s View :
Keynes has criticised Pigous’s formulation of Say’s Law on both theoretical as well as
practical grounds.
As per Pigou, reduction in money wages , through its downward effect on cost of
production and prices, tends to increase employment. Oppositely Keynes pointed out
that wages are not only costs of production, but also the incomes of labourers.
Reduction in wages will reduce costs and prices, again reduces income also which in
turn decreases aggregate demand and lastly employment.

On the practical side it is difficult to reduces wages because of opposition of worker,

trades unions and minimum wage regulation from the government.
4. No Automatic Adjustment:
Keynes rejected the self-adjusting and automatic character of economic system. In the
case of liquidity trap rate of interest cannot fall further as per investor expectation. Again
when investment function becomes interest inelastic and money rigid downwards, the
economic system will not be self-adjusting.
5. Government Intervention:
Keynes did not believe in the self-adjusting mechanism of the competitive system and
recommended government expenditure in public works in order to save the economy
from uncertainties of the private investment. Keynes analysis leads to the conclusions
that the economy does not automatically reach full employment equilibrium and the
policy of “Laissez-faire” Is not a reliable policy.
6. Saving Investment equality:
According to classical economists, saving and investment are equal and this equality is
maintained by the interest rate adjustment mechanism. In the opinion of Keynes income
is the equilibrating force between saving and investment. Whenever saving exceeds
investment, aggregate demand decreases and income level declines. As a result
savings falls and becomes equal to investment. Similarly, if investment exceeds saving,
income level rises, saving increases and becomes equal to investment.
7. Role Of Money:
Classical economists stated main function of money as a medium of exchange. But
Keynes emphasized the store of value function of money. According to Keynes, when
there is unemployment of resources, an increase in the quantity of money increases
output and employment, and prices rise very little and that too only indirectly.
BUSINESS ECONOMICS
8. Long (MACRO)
Run Analysis: (13) TRADE CYCLE

The Classical economists believed in the long run full employment equilibrium through a
self-adjusting process. Keynes had no patience to wait for the long period for he
believed that “In the long run, we are all dead”.
9. Static Analysis :
The Classical theory gives a static picture of the economy by assuming a state of full
employment. It ignores the empirical facts of the changing levels of employment in the
real world.
10. Not a General Theory:
The Classical theory of employment is the not a General Theory. It deals with the special
case of full employment only. According to Keynes there may be full employment, over-
full employment or under-employment.

11. Assumption Of Perfect Competition:

The Theory is also based on the unrealistic assumption of Perfect Competition . Perfect
Competition does not exist in the real world.

11. Not Practical :

The Classical Theory has little Practical significance. It does not provide any solution to
the problems of unemployment of trade cycles .

Conclusion
This is a basic law of Classical Economics . This theory is Perfectly Logical in its
content , It has little practical relevance. As we know this theories is based on
some unrealistic assumptions like Laissez Faire , Self-adjustment , Full-
employment and Non- existence involuntary unemployment are irrelevant in
contemporary capitalistic world .

The Keynesian Theory of Income and Employment

Introduction : The classical theory of employment and income assumed existence of

full employment in capitalist economy. Professor J.M Keynes, in his book “the general
theory of Income employment,Interest and Money” published in 1936 exposed the
weakness of classical theory. In the 1929 recession all the assumptions of classical
theory failed. As per classicist, wage cut could not reduce unemployment. Keynes gave
a new turn by giving concept of effective demand. He told by increasing effective
demand unemployment can be increased.

1. The Principle of effective demand:

BUSINESSKeynes
ECONOMICS (MACRO)
Theory of employment starts(14) TRADE
with the principle of effective demand. CYCLE
He states
that total employment in economy is determine by total or aggregate demand .The
principle of effective demand is heart of the Keynesian Theory of income and
employment. Keynes attributes unemployment to “A lack of effective demand”. That is
why Keynes theory of employment is often called as “demand deficiency theory” .
Effective demand includes :
1. Consumption Demand
2. Investment Demand

As the real income of the society increases , consumption will also increase but by less
than the increase in income . The imbalance creates a gap which can be filled up by
raising investment. Lack of effective demand will result in unemployment . So
employment can be increase by increasing effective demand through increase of
investment expenditure in the country . Effective demand equals national income
ED=Y=C+I=O=Employment
Where :
ED= Effective Demand
Y= National Income
C=Consumption Expenditure
I= Investment Expenditure
O= National Output

2. Determinants of Effective Demand :

As per Keynes the level of effective demand in an economy is determined by the
interaction of the Aggregate Demand Function (ADF) and the Aggregate Supply
Function (ASF)

Aggregate Demand Function:

“The Aggregate Demand Function is a schedule of the various amounts of the money
which the entrepreneurs in an economy expect from the sale of their output at varying

level of employment”. It refers to the receipts which the entrepreneurs taken together
aspect from the sale of output .
BUSINESS ECONOMICS (MACRO) (15) TRADE CYCLE

Figure 7.7
In the Fig.AD is aggregate demand curve .
The fig. shows that aggregate demand price
Increases or decreases with an increase or
Decrease in the volume of employment.

Aggregate Supply Function:

“Aggregate supply function is a schedule of the various amount of money which the
entrepreneurs in an economy must receive from the sale of output at varying level of
employment”. It refers to the cost .
BUSINESS ECONOMICS
Y (MACRO) (16) TRADE CYCLE

AS
R2
Proceeds

R1
R

O N N1 N2 X
Employment

Figure 7.8
In the Fig.AS is aggregate supply curve .
The fig. shows that aggregate supply
Increases or decreases with an increase or
Decrease in the volume of employment.
Intersection of ADF & ASF :
In fig. the amount of employment is given by the point of intersection between the
Aggregate demand function and Aggregate supply function .
This point is the point of effective demand. At this point , the aggregate demand price is

equal to the aggregate supply price. The entrepreneur would earn the highest normal
profits at this point and they provide the equilibrium level of employment ON1.
. According to Keynes the equilibrium between AD & AS can and often does take
place at a point less than full employment
.

.
Y

ASF

E
Proceeds

R2 R1

ADF
R

O N N1 NF X
Employment
BUSINESS ECONOMICS (MACRO)
Figure 7.9 (17) TRADE CYCLE

In the figure 7.9,the amount of employment is given by the point of intersection between the
aggregate demand function and the aggregate supply function. This point is the point of
effective demand. At this point, the aggregate demand price is equal to the aggregate supply
price. The entrepreneur would earn normal profit at this point and they provide the
equilibrium level of employment ON1 .According to Keynes, the equilibrium AD and AS can
and often does take place at a point less then full employment. At the full employment
level, AD=AS only if, investment spending is sufficient to fill the gap coming between income
and consumption. Keynes gave importance to aggregate demand function. The main reason
was that Keynes analysis is short run analysis. Aggregate supply schedule depends upon
the physical and technical conditions, which remain constant in the short period.

COMPLETE KEYNESIAN THEORY OF EMPLOYMENT

Effective Demand=Total Output=Total Income=Employment

The effective demand results in output. Output creates income and also provide
employment. All these four quantities are equal to each other.
1.The effective demand is determined by A.S.F and A.D.F. Keynes assumes A.S.F is
remains constant in the short period.He concentrated only on A.D.F.
BUSINESS ECONOMICS (MACRO) (18) TRADE CYCLE

CHART
Effective Demand = Total Output = Total Income = Employment

Aggregate Supply Aggregate Demand

Function (A.S.F) Function (A.D.F)

Consumption Investment Government Expenditure

Size of Propensity
Income to Consume
Marginal Efficiency Rate of
Of Capital Interest

Supply Price Prospective Yield

Of Capital from Capital Liquidity The Supply of
Assets Assets Preference of Money in
the Public the Economy

Transactions Precautionary Speculative

Motive Motive Motive

2. A.D.F determined by Consumption expenditure and investment expenditure and Government

Expenditure .Keynes ignores Government Expenditure in his statement.
3. The Consumption expenditure is determined by (1) size of the income and (2) Propensity to
consume.In the short run income and propensity to consume remain constant.
4. The investment expenditure is determined by the Marginal efficiency of capital and rate of
interest.
5. Marginal efficiency of capital is determined by the Supply price of Capital asset and the
Prospertive Yield from Capital assets. Both remain constant in short run.
6. The rate of interest is determined by The Community’s Liquidity preference and Supply of
money. The supply of money remain constant in shirt run. And the Liquidity preference is
determined by three motives
(a) Transaction motive
(b) Precautionary motive
BUSINESS ECONOMICS (MACRO) (19) TRADE CYCLE

(c) Speculative motive

The above summary can give us the idea of steps to be taken to control inflation and
unemployment. He concentrates on aggregate demand as aggregate supply is constant in stort
run. While concluding we can say that Keynesian theory of employment and income give
emphasis on effective demand. He simply told that by increasing effective demand problem of
unemployment can be solved. The concepts given by Keynes are very development in macro
economics.

MODEL QUESTIONS

1. Explain the theory of say’s Law of Market.

2. Explain Fisher version regarding classical theory.
3. Explain Pogou’s version regarding classical theory.
4. Describe the Keynesian theory of income and employment.
5. Explain Criticisms of classical theory of employment given by
Keynes.
PPP