Keynes formulated a new theory of employment in contrast to the classical theory of employment.Classical economists had emphasized the role of Supply.Keynes emphasized role of demand in the determination of output and employment.According to Keynes theory of income determination –the equilibrium level of national income is determined at the level where Aggregate Demands for goods and services = their Aggregate Supply.Keynesian Theory of National Income Determination: A Simple Economy Model
Keynesian theory of income determination is developed in three different model 1. A Simple Economy Model or Two Sectors ModelHouseholds + Firms Sector2. A Closed Economy Model or Three Sectors ModelHouseholds + Firms Sector + Government Sector3. A Open Economy Model or Four Sectors ModelHouseholds + Firms Sector + Government Sector + Foreign SectorKeynesian Theory of National Income Determination: A Simple Economy Model
National Income : Two Sector Model
Aggregate Supply (AS) refers to the total supply of goods and services in an economyAggregate Supply (AS) = C + SAggregate Demand (AD) refers to aggregate demand for consumer goods and investment goodsAggregate Demand (AD) = C + IWhere,C=Aggregate ConsumptionS=Aggregate SavingsI = Aggregate InvestmentAggregate Demand for consumer goods or consumption expenditure accounts for over 65% of India’s GDP.