Keynesian Theory of Income Determination

Keynesian Theory of Income Determination:

Keynes is believed to be the greatest economist of the 20th century. He wrote numerous books. Though, his ‘The General Theory of Employment, Interest and Money’ (1936) won him everlasting celebrity in economics. The book revolutionized macroeconomic idea. Keynesian economics is termed as Keynesian revolution.

The central trouble in macro economics is the determination of income and employment of a nation as an entire. That is why modern economists too call macro economics as the theory of income determination. Keynes brings out all the significant aspects of income and employment determination and Keynesian economics itself can be termed as macro economics. He attacked the classical economics and efficiently discarded the Say’s Law, the very foundation of classical theory. He believed that in short run, the level of income of an economy based on the level of employment.

The higher the level of employment, higher will be the level of income. An inspection of the basic ideas of Keynes can be obviously understood from the concise summary in the flow chart. Total income based on total employment which depends on effective demand which in turn based on consumption and investment expenditure. Consumption based on income and propensity to consume. Investment based upon the marginal effectiveness of capital and the rate of interest.

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