Theory of employment and multiplier

     Say 's Law of Market
"Supply always creates its own demand "
     
        Implications of Say's law
1. Self-adjusting economy
2. No general over-production
3. No general unemployment
4. Wage-cut creates full employment
5. It pays society to employ the unemployment resources

     






       Leakage of Multiplier theory
1. Saving
2. Liquidity (taralta)
3. Time lag (antar)
4. Purchase of bond
5. Loan payments
6. Price rise
7. Taxation

          Operation / Limitations of multiplier
1. Regular investment
2. No change in MPC
3. Availability of consumer goods
4. Existence of closed economy
5. Existence of less then full employment
6. Constant price level
7. Existence of industrialised  economy

               here, K = multiplier  , y = Income  , I = investment  ,*y = change in income   ,
                         *I = change in investment
          We know that,        
           y = c + I  .........eq(1)
           c = a + by .........eq(2)
in the given eqn 1 and 2 let the change in consumption by *c , investment by *I and income by *y then eqn1 and 2 become
          y + *y = c + *c + I + *I   ........eq3
          c + *c = a + b ( y + *y)
          or c + *c = a + by + *y   ...........eq4
  subtract eqn 1 form eqn 3 and eqn 2 form eqn 4
          y + *y - y = c + *c + I +*I - c -I
           *y = *c + *I   ..........5
      now,     c + *c - c = a + by + b *y - a - by
            *c = b*y
  substitute the value of *c in eqn5
     *y = b*y - *I
     *y - b*y = *I
     *y (1-b) = 1/ (1-b)
      K = 1/ 1-mpc        where b = mpc
       K = 1/ mps

    Table of  Multiplier 
  MPC               K= 1/1-MPC
    0                         1
    0.25                    1.33
    0.50                    2
    0.75                    4
     1                        &

                                           

    Criticisms of Say's Law and Classical Theory of Employment
1. Supply does not create its own demand
2. Wage-cut will not cure unemployment
3. No perfect competition in the real world
4. Long -run is not important
5. Need to state intervention (hasthachep)
6. Economy is not self-adjusting
7. Assumption of full employment is unrealistic
8. Money is also demanded for speculative(sattapagi) motive

 

              Assumption of Keynes Theory of Employment
1. Short-run
2. Perfect competition
3. Law of diminishing returns
4. Closed economy
5. Aggregate concept
     Principle of effective demand

    Weakness of Keynes theory
1. Incomplete treatment of unemployment
2. Assumption of full employment
3. Relationship between effective demand and volume of employment
4. Too much aggregative
5. Short-run concept
6. Wage and employment

     
      Keynes theory of employment superior to Classical theory
1. Realistic and practical approach
2. Dynamic Theory
3. Support of state Interference (sarkari hastachep ko samarthan)
4. An importance place to fiscal policy (beteya neti)  in place of monetary policy(maudric neti)
5. Opposes(aabarodh) wage reduction(rass)  policy