Determinants Or The Level Or National Income And Employment Tools of Modem Employment Theory

Tools of Modem Employment Theory

Before We Discuss The Determination Of National Income And Employment It Seems Necessary That The Various Tools Or Determinants Of Level Of National Income And Employment Are Explained To The Readers These Tools Are Consumption Saving And Investment Let Us Begin With The Concept Of Consumption Function.

(1). PSYCHOLOGICAL LAW OF CONSUMPTION

J.M. Keynes In His Book General Theory Analysed The Consumption Behaviour Of The Community On The Basis Of Human Psychology He Propounded A Law Which Is Known As Psychological Law Of Consumption According To This Law The Household Sector Spends A Major Part Of Its Income On The Purchase Of Consumer Goods And Services Such As Food Clothingmedicines Shelter Etc For Personal Satisfaction The Expenditure On Consumption (C) Is The Largest Component Of Aggregate Expenditure Whatever Is Not Consumed Out Of Disposable Income Is By Definition Called Saving (S) Disposable Income = Consumption +Saving Or I = C + S.

According to Keynes The Level Of Consumption In A Community Depends Upon The Level Of Disposable Income As Income Of A Nation Increases Its Consumption Also Increases But It Increases Not As Fast As Income I E It Increases At A Diminishing Rate This Relationship Between Consumption And National Disposable Income Is Called Consumption Function In The Words Of Keynes Men Are Disposed As A Rule And On The Average To Increase Their Consumption As Their Income Increases But Not By As Much As The Increase In Their Income The Psychological Law Of Consumption Brings Out The Following Properties Of The Consumption Behaviour Of The Community.

(1)    The Level Of Consumption Is Directly Functionally Related To The Level Of Disposable Income = C = f(y)

(2)    With The Rise In The Level Of Income The Consumption Level Also Rises In The Short Run But At A Decreasing Rate = AC < AY.

(3)    As The Level Of Income Increase The Households Devote A Part Of The Incremental Income To Increase In Consumption And The Other Part To Increase Savings Symbolically AY = AC + AS.

The Keynesian Consumption Function Is Now Explained With The Help Of Schedule And A Curve.

(Rs. billion)

Disposable income (Y)	Consumption (C)	Saving (S)	APC. CN	MPC. AC/AY
0	.             50	-50
100	100	0	1.00	0.5
200	150	50	0.75	0.5
300	200	100	0.67.	0.5

In The Schedule It Is Shown That As The Nations Disposable Income Increases The Aggregate Consumption At Various Levels Of Income Also Increases But At A Decreasing Rate The Same Data Is Now Shown In The Graph 30.1 Below

National Disposable Income (billion of Rs)
Following Are The Observations About The Functional Relationship Between The National Disposable Income And The Economy’s Aggregate Expenditure.
(1)  At Every Point On The 45^° Line Oy A Vertical Line Drawn To The Income Axis Is At The Same Distance From The Origin As A Horizontal Line Drawn To The Consumption Axis The 45° Line Thus Is The Line Along Which Expenditure Equals Real Income.
(2)  The Consumption Function Is Represented By Consumption Line (C) The Consumption Line C Is Positively Sloped Indicating That As The Disposable Income Increases The Amount Of Expenditure In The Economy Also Increases.
(3)  The Consumption Line (C) Intercepts At Y Axis Showing Negative Saving Of Rs. 50 Billion During A Short Period.
(4)  At Point B The Consumption Line (C) Intersects The 45^° Helping Line (Oy) At Point B Consumption Equals Disposable Income And There Is Zero Saving B Is Called The Break Even Point.
(5)  Left To The Point B The Consumption Line C Is Above The Income Line Y It Indicates Negative Saving.
(6)  Right To The Point B The Consumption Line C Is Below The Income Line Y It Denotes Positive Savings.
Summing Up Consumption Is A Function Of Income C = F (Y) Consumption Function Is The Whole Schedule Which Describes The Amounts Of Households Consumption And Different Levels Of Disposable Income Importance Of Consumption Function
The Concept Of Consumption Function Occupies An Important Place In Macro Economic Theory. Its Role Is Significant In The Following Ways.
(1)    Consumption Is An Important Component Of Aggregate Demand According To Keynes Consumption Function When The Level Of Income Of A Nation Increases The Amount Of Consumption Also Increases But The Increase In Consumption Is Less Than The Increase In Income Of The Society Hence Saving Gap Emerges Between Income And Consumption Resulting In Deficiency Of Aggregate Demand Which Causes Overproduction And Unemployment In The Economy.
(2)       J. M. Keynes Concepts Of Consumption Function Helps In Explaining The Turning Points Of Business Cycles Both Peak And Recession.
(3) According To Keynes The Change In Consumption Divided By Change In Income (Mpc) Is Less Than One He Based The Theory Of Investmentmultiplier On The Concept Of Marginal Propensity To Consume (Mpc = (Ac Tc^-₁)) The Concept Of Investment Multiplier Occupies An Important Place In Macro Economic Theory.
(4) The Concept Of Consumption Function States The Positive Relationship Between The Level Of Disposable Income In The Economy And The Amount Spent On Consumption This Relationship Between Income And Consumption Is Stable In The Short Run The Private Investment On The Other Hand Fluctuates Greatly In The Economy It Throws Light On The Role Of Government In Promoting Employment And Price Stability By Adopting Proper Fiscal Measures.