Discuss the main features of keynesian economics.
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The main features of Keynesian analytical framework were as follows:
1. Keynesian analysis was developed to handle a developed and free market economy. By its very nature, such an economy has adequate productive resources and ability to provide employment to its work force. If there is unemployment in such an economy, the explanation does not lie in the insufficiency of productive resources. Moreover, since the economy is characterized by private enterprise, it follows that the decisions made by economic units in their various capacities as consumers, producers, etc are guided by their "rationality" or self-interest. Accordingly, the existence of unemployment must be due to the fact that the employers and investors do not have enough of economic incentives to increase their activities.
2. Keynes assumes that the economy has an unutilised excess productive capacity By implication, it is possible to add to output and employment without fir adding to fixed productive resources. What is needed is to increase aggregate demand by increasing expenditure in the economy.
3. Keynes assumes the existence of involuntary unemployment, that is, the situation in which workers are ready to accept employment at going wage rate but are not able to get it. He does not think that there is need to be concerned about two other kinds of unemployment.
(a) "Voluntary" unemployment in which case the workers are not ready to accept employment at the going wage rate.
(b) "Frictional" unemployment which arise on account of normal mobility of labor as between different employers, industries, and locations. Mobility of labor forces intervals of unemployment on the labor involved in changing jobs.
4. The analytical framework of Keynes is confined to short period only. For this reason, a change in output and employment takes place with existing technology and resources. He is not concerned with long-term growth trends. The inference is that any changes in output leads to a corresponding change in employment of labor also. This is an important limitation of Keynesian analytical framework particularly when we consider the problem of choice of investment projects.
5. Keynesian analysis conforms to the technique of 'comparative statics'. In it, conditions at the beginning of a time period are described and the result at the end of the period is estimated. In other words, it is a technique in which end positions at selected points of time are compared.
6. Keynes does not incorporate changes in prices in his basic analysis of the determination of output and employment in the economy. All the variables are estimated in "real terms". In Keynes, a change in output is not the same thing as a change in the money value of output. Similarly, a change in employment is not a change in money wage bill. Instead, the changes are in "real output" and "real employment", that is, at constant prices.
7. Though Keynes ignores changes in prices, money plays a crucial role in his analytical framework. It provides a basis for an element of uncertainty in the working of the economy. And this, in turn, affects income, output and employment. It also deeply affects the rate of investment and through it, the entire level of economic activities.
8. Keynesian analysis is based on macro variables. The economy assumed by him is quite flexible and adjustments take place rapidly. As a result, any change that takes place in one part of the economy quickly spreads itself throughout the economy. It does not suffer from the type of rigidities and institutional hurdles, as is the case with developing countries.
9. In a simplified form, Keynesian analysis ignores the role of government sector. This assumption is dropped later when remedies for chronic and persistent underemployment are considered.
10. Keynesian analysis was developed in the context of a closed economy. However, as in the case of government sector, it can be easily extended to incorporate the "external sector" as well.
1. Keynesian analysis was developed to handle a developed and free market economy. By its very nature, such an economy has adequate productive resources and ability to provide employment to its work force. If there is unemployment in such an economy, the explanation does not lie in the insufficiency of productive resources. Moreover, since the economy is characterized by private enterprise, it follows that the decisions made by economic units in their various capacities as consumers, producers, etc are guided by their "rationality" or self-interest. Accordingly, the existence of unemployment must be due to the fact that the employers and investors do not have enough of economic incentives to increase their activities.
2. Keynes assumes that the economy has an unutilised excess productive capacity By implication, it is possible to add to output and employment without fir adding to fixed productive resources. What is needed is to increase aggregate demand by increasing expenditure in the economy.
3. Keynes assumes the existence of involuntary unemployment, that is, the situation in which workers are ready to accept employment at going wage rate but are not able to get it. He does not think that there is need to be concerned about two other kinds of unemployment.
(a) "Voluntary" unemployment in which case the workers are not ready to accept employment at the going wage rate.
(b) "Frictional" unemployment which arise on account of normal mobility of labor as between different employers, industries, and locations. Mobility of labor forces intervals of unemployment on the labor involved in changing jobs.
4. The analytical framework of Keynes is confined to short period only. For this reason, a change in output and employment takes place with existing technology and resources. He is not concerned with long-term growth trends. The inference is that any changes in output leads to a corresponding change in employment of labor also. This is an important limitation of Keynesian analytical framework particularly when we consider the problem of choice of investment projects.
5. Keynesian analysis conforms to the technique of 'comparative statics'. In it, conditions at the beginning of a time period are described and the result at the end of the period is estimated. In other words, it is a technique in which end positions at selected points of time are compared.
6. Keynes does not incorporate changes in prices in his basic analysis of the determination of output and employment in the economy. All the variables are estimated in "real terms". In Keynes, a change in output is not the same thing as a change in the money value of output. Similarly, a change in employment is not a change in money wage bill. Instead, the changes are in "real output" and "real employment", that is, at constant prices.
7. Though Keynes ignores changes in prices, money plays a crucial role in his analytical framework. It provides a basis for an element of uncertainty in the working of the economy. And this, in turn, affects income, output and employment. It also deeply affects the rate of investment and through it, the entire level of economic activities.
8. Keynesian analysis is based on macro variables. The economy assumed by him is quite flexible and adjustments take place rapidly. As a result, any change that takes place in one part of the economy quickly spreads itself throughout the economy. It does not suffer from the type of rigidities and institutional hurdles, as is the case with developing countries.
9. In a simplified form, Keynesian analysis ignores the role of government sector. This assumption is dropped later when remedies for chronic and persistent underemployment are considered.
10. Keynesian analysis was developed in the context of a closed economy. However, as in the case of government sector, it can be easily extended to incorporate the "external sector" as well.
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