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Study Note - 4
THEORY OF EMPLOYMENT
This Study Note includes • Labour • Population Theories • Unemployment • Concept of Employment • Capital • Capital Formation
Definition Labour is an important ingredient of production. Without labour, the other factor inputs cannot be activated Labour helps production in two ways – As a producer and as a consumer. Things are produced because they are consumed. Labour is defined as “any exertion of body and mind undertaken wholly or partly with some object other than the pleasure derived from the labour itself”. Thus labour includes both manual and intellectual, and the exertion of body or mind should be not for pleasure but for earning money. Features of Labour – Labour as a factor of production has some characteristics that distinguish it from other factors. Labour is a perishable factor. A day’s labour lost cannot be recovered. Hence the workers often are exploited because they cannot preserve their labour power for future. Secondly labour cannot be separated from labourer. Labour sells his work and he himself remains his property. Thirdly labour is a mobile factor. Apparently workers can move from one job to another or from one place to another. But, in reality there are many obstacles in the way of free movement of labour from job to job or from place to place. Fourthly highly skilled labour are specific factors while highly unskilled workers are nonspecific in the sense they can be used for any type of manual work.
Another feature of labour is that the supply of labour in terms of hours of work decreases when wage rates are high. For this the individual supply curve of labour is backward bending after a point. Thus while the supply of commodities increases when their price rises, the individual labour supply (in terms of hours of work) decreases with an increase in the price of labour.
4.2 POPULATION THEORIES
A. Malthusian Theory of Population Growth In 1978, Thomas Robert Malthus expressed his views on the population growth in his “Essay on the Principle of Population”. His arguments on the pattern of population growth in an economy are as follows : (1) In any country, total population grows at a faster rate than the total food grain production. According to him, the production of foodgrains increases at an arithmetical progression (e.g., 2,3,4,5,6 etc.) while population grows in geometrical progression (e.g., 2, 4, 8, 16, 32 etc). Within a short period, the total population becomes larger than the size of the foodgrain production i.e., foodgrain production per capita comes down to a low level. At this stage, the country is said to be overpopulated. The signs of such overpopulation, according to Malthus, are as follows : (a) (b) (c) Large-scale poverty; Large-scale starvation and malnutrition; and Emergence of various diseases and epidemics.
He also believes that this excess pressure of population is automatically reduced due to some natural calamities like floods, droughts, wars etc. In this way, the nature through its own forces, tries to maintain a balance between the population and foodgrains productions. These are called positive checks. Malthus also believes that the people should also take some preventive measures to check such growing pressure of population. (For instance, population control methods, prevention of early marriage etc.), These are called the preventive checks.
Theory of Employment
Malthus’s doctrine is illustrrated below : Malthus Theory of Population Population increases in a GP - 1,2,4,8,16,32........ Food increases in AP - 1,2,3,4,5,6,........
Imbalance leads to overpopulation
Preventive Checks - late marriage, moral restraint etc
Positive Checks - misery, war, famine, flood etc
Critical Evaluation : The population theory of Malthus has been criticized from different angles. (1) Population may not grow in a geometrical progression : Many economists are of the view that population may not grow in a geometrical progression. In fact, population of different developed countries of the world has increased at a slow pace during the late 19th and 20th centuries. Thus, there is an interdependence between the level of economic development achieved and the population growth in a country. Law of diminishing product may not be operative : Malthusian theory shows that the production of foodgrains in a country grows in an arithmetical progression. The implicit logic behind such argument was the operation of the law of diminishing marginal productivity. That is to say, given the supply of cultivable land, growing population pressure on land leads to an increase in production at a decreasing rate. However, this law of diminishing product may not be operative if better seeds, fertilizers, irrigation, agricultural implements, etc. are introduced in agriculture. ECONOMICS
Thus, the Malthusian theory has not taken into account the technological revaluation in agriculture. (3) Growth rate of foodgrains production may be higher : The rate of growth of population may not be greater than of foodgrains production in a country. For instance, population of India has increased by about 185 per cent during 1951-2001, but foodgrains production of India has increased by about 258 per cent during the said period. (4) Increased supply of labour facilitates economic growth : The population problem of a country should not analysed only in terms of foodgrains production. Increased population not only raises the demand for foodgrains, but also the supply of labour in a country. If this labour force can be made more skilled and educated then they contribute to the growth of total output in the country to a great extent. If the country can produce different export items then the country would be able to import even foodgrains from abroad, because the import bill can easily be met from the export earnings. Overpopulation is not the only cause of poverty : Growing incidence of starvation may not be the only indicator of overpopulation. This theory shows that a situation of overpopulation is only responsible for such growing incidence of poverty and starvation. But, inequality in the distribution of income and wealth can also create such a situation.
B. Optimum Theory of Population In 30’s a new theory of population was worked out which is known as the Optimum Theory of Population. The core of the theory is a concept called “Optimum Population”. It was held that for every economy there is an optimum level of population growth. IT is the level where ‘maximum returns’ can be obtained. The Optimum Population simply is the size of population that a country can support without any stress and strain. Thus in this theory the danger of over population was considered not in the context of food supply but the total wealth of a country. The test of over population or under population were not the shortage or surplus of foodgrain but the maximization of national wealth and welfare. If at any time the actual population of a country exceeds its optimum point the country will face different economic problems and its returns will be less than maximum. On the other hand, if the actual population is less than optimum, National output will also be less because of under-utilisation of productive capacity. Only when actual population is equal to optimum population that the country will enjoy the greatest good of the greatest number.
Theory of Employment
A formula for estimating deviation of actual population from the optimum has been suggested. It is A -O O An economy is said to be under populated if A < O and Overpopulated when A > O. Only when A = O that resources of the economy are used in the best possible way to secure the highest possible return for manpower. One feature of this Theory is that unlike Malthusian theory it is not pessimistic about the growth of population. The Theory highlights the fact that population may help or hinder economic development of a country depending upon the availability complementary resources. Further unlike Malthusian theory, it is not narrow. It does not consider the growth of population with the growth of food supply. Instead it considers demographic growth with the growth of national resources as a whole. Moreover the Theory is important in another respect. It suggests that under population is as much harmful as overpopulation for a country. Malthus only considered the dangers of overpopulation ignoring the case of under population. The Rich countries of the World are nowadays suffering from the problem of under-population and this is one of the vital reasons for which they cannot fully utilize their productive capacity. The most important problem of this Theory is that it is very difficult to ascertain what is the optimum number of population that a country can support. Even if the optimum can be determined, it will vary from time to time because of any change in the resource composition, technology, trade of an economy so the concept of optimum as envisaged in this theory is not a static one. It will vary from time to time and from country to country. Further the term Optimum may be interpreted in many ways. It may mean the size of population that maximizes the average product or income per head. It may also mean the size of population that maximizes net social welfare or it may mean the size of population that maximizes total product. The theory however considers Optimum Population as the maximum population that is supportable with existing resources of a country. C. Theory of Demographic Transition Almost all demographers (who study demography or population theories) and social scientists agree that population growth in every country passes through many stages. Each stage has its own peculiarity. This theory indicates that particular types of demographic phases are associated with particular stages of industrialization. On the basis of the economic history of many countries of the world, this theory wants to establish that movement of a country from a traditional agricultural system to a highly industrialized urban economy, also signifies its travel from a stage of high fertility (and mortality) to a state of low fertility (and mortality).
According to Prof. O.P.Walker, there are five stages of such demographic transition: 1st Stage : At this stage, both the death rate and the birth rate remain very high, but the former exceeds the latter. As a result, population does not increase to a great extent. This is called a high stationary stage. At this stage, the birth rate does not come down but the death rate starts falling due to improvements in health facilities. As a result, population increases rapidly. This is called an early expanding stage. Both birth and death rates decrease at this stage. Though the birth rate exceeds the death rate, the distance between them becomes less. This happens when the country attains a certain level of agricultural development and steps towards urbanization. This is called the late expanding stage. Here the population size grows slowly. At this stage, the death rate reaches its lowest and at the same time birth rate also comes to a low level. Growth in population becomes stagnant. But, unlike the first stage, it is called low stationary stage. At this stage, the death rate becomes more than the birth rate, and it may be regarded as a declining stage.
2nd Stage :
3rd Stage :
4 Stage :
5th Stage :
While reviewing these stages, Prof. Thompson and Notestein opined that the first and fifth stages were unusual. According to them, only the three intermediate stages are relevant. They named these three intermediate stages (viz., the second, the third and the fourth stages) as the pre-transition stage, transition stage and post-transition stage respectively. The explanation of Karl Sax about the demographic transition also shows four stages of such transition also shows four stages were similar to the explanation given by Walker about the first four stages of transition in his own theory. Now, we can give a diagrammatic representation of these theories of demographic transition Y (Fig. 4.1)
Birth / Death Rate
Death Rate A Birth Rate C B D I 0 T0 II X T1 III X Y T2 Time (T)
Theory of Employment
In Fig. -2, the time paths of birth rate and death rate have been shown. Population growth is determined by the gap between these two curves. The first stage (stage I) of demographic transition becomes visible up to the time period To. Similarly, the second (stage II) and the third (stage III) stages of demographic transition are discernible within the time horizon ToT1 and T1T2 respectively. Let us assume that points X and Y represent two countries having the same current rate of population growth (i.e., AB = CD). But, it is observed that, incase of country Y, population growth will soon slow down because the falling death rate has almost reached its minimum and has been accompanied by a falling birth rate. However, in country X, the population is expected to rise in future because of the increase in the gap between birth rate and death rate. Thus, two countries having the same observed population growth rate at present, may indicate radically different future prospects.
Employment The classical economists were not very much concerned with employment or unemployment. It was because they believed in Say’s Law. J.B.Say’s law stated that ‘supply creates its own demand’ that is every good produced in the market is born with a demand tied round its neck. From the law follows that there can never be more than frictional unemployment or sectional overproduction. It was believed that private enterprise would always employ all available factors of production, provided prices and wages were sufficiently flexible. Thus they ruled out the possibility of general over production, as the demand for all goods taken together will always be sufficient to sell them. If it is so, restricting of output in general is not necessary. If a general over supply is impossible, production will continue upto the point where all factors are fully employed. It was the logic underlying the assumption of full employment. The classical economists also believed that one man’s income depended on another man’s expenditure and that if some people refused to spend a part of their income, the real resources left over by the former would always be used by some businessman for the creation of capital equipment. In other words, what is saved is being automatically invested. In mid 30s the classical conclusions regarding employment were criticised by Keynes and his followers. At times, there may be deficiency of aggregate demand in the society arising out of lack of purchasing power in the hands of the people. In such a situation supply cannot create its own demand. It can create demand but not effective demand. So excess produce may exist with unsatisfied demand. Demand deficiency may thus throw an economy out of full employment. This happens in a situation of depression.
Kenesian Theory of Employment According to Keynes the aggregate volume of output, during a certain period, depends on the effective demand of the people. Effective demand of the people depends on total expenditure for goods and services. The total expenditure is formed of consumption expenditure and investment expenditure. Total expenditure is equal to total income. Hence, Y = C + I. The total of consumption and investment expenditure determined of output and employment. Hence the determinants of consumption and investment are the determinants of output and employment. Consumption expenditure means spending of money for purchasing goods and services for utility. Investment expenditure, on the other hand, implies spending for new capital asset. Consumption according to Keynes depends upon objective and subjective factors. Income is the most important factor influencing consumption c = f(y). The definite relation that exists between income and consumption is known as Consumption Function. When income increases consumption expenditure also increases but not by full amount. In other words, consumption is less than unity (c<1) but greater than zero (c>0). That part of additional income people do not spend for consumption is their savings. Therefore dY = dc + ds. Not only does current consumption depends on current income but on past savings as well. Investment Function Investment expenditure is normally business sector’s expenditure with the aim of securing profit. Expected profitability of a given dose of investment depends on the margin between Return from and cost of investment. The cost of investment is the cost of credit viz. Rate of interest. The volume of investment varies inversely with rate of interest (r).
Consumption & Investment (C+I)
So, dI / dr < 0.
A P Q M R N 450 Y1 Income (Y)
Theory of Employment
Let OX axis measures income and OY measure consumption and investment expenditures. OA curve is a straight line on OX and OY at angle of 45o. In view of this all points on it are equidistant from OX and OY axis. So at all points on this curve Y = E = C + I. CC curve shows the amount of consumption at each level of income. C + I curve shows the total expenditure. At OY1, total expenditure is MY1 while consumption expenditure NY1. So MY1 – NY1 = MN represents investment expenditure. At the point M, C + I curve intersects OA (Y = C + I) curve so that OY1 = MY1 that is total income is equal to total expenditure (MOY1=OMY1) Since M is on OA, OY is equal expenditure curve and the 45o line a stable equilibrium of income and output (consumption good and investment good). Is it the point of full employment? It may be or its may be not. Suppose at OY1 level of income the output produced is not sufficient to absorb all factors. At OY2 level of income all factors may be employed provided C + I curve shifts upward and intersects OA curve. The shortage in total expenditure required to be fulfilled is RQ. This needs either more consumption expenditure or more investment or both.
Unemployment - Causes and Forms
Unemployment arises when even with the willingness to work at the current wage, people are unable to get a job. It is involuntary in nature. Unemployment may be voluntary also when a person is unwilling to work (idle rich) or unable to work at the current wage rate. According to classical economists, the main cause of unemployment is rigidity of wages. If wages were sufficiently flexible, all people will be employed. A general wage cut is what they prescribed for achieving full employment or near full employment. Like the price of any commodity, if the price of labour falls its demand will increase. Logically it follows that, according to classical writers, all unemployment is voluntary because man is not willing to accept current wage as being too low. Lord Keynes views on unemployment can be explained by his general theory of employment. Employment depends upon effective demand made up of consumption expenditure and investment expenditure. A deficiency of demand due to fall in expenditure (C + I) will cause a fall in output and employment. When the deficiency is high, the economy will experience large scale unemployment and depression, as happened in the 1930’s Great Depression. Keynes advocated more government investment to overcome the shortfall in private spending that is, deficiency of demand. As has been stated earlier people are said to be unemployed when they remain jobless despite their eagerness to work at the current wages. Although there are general explanations for this state of affairs, there are specific reasons for various forms of unemployment as well.
In agricultural economies, one may find seasonal and disguised unemployment. Crop cultivation is a seasonal occupation. A particular crop is grown during a particular season and not throughout the year. So after harvest, men are thrown out of employment till the next season. Two broad causes of such unemployment are (i) single cropping (ii) no off-season employment opportunity. Besides agriculture, this type of joblessness can be found in some non agricultural activities as well where demand is of a seasonal nature or it varies erratically (woolen goods, umbrella, dock labour). The seasonally unemployed men may take up some other non farm job for the off season. A farmer, for example, may make mat or basket when there is no pressure of crop cultivation. In traditional agriculture, another type of unemployment can be seen. It is disguised unemployment causing much harm to poor economies. It implies that a large part of the workforce engaged in agriculture could be removed without reducing total output. It is applicable in case of family farming where all family members (that multiply generation after generation) grip a given plot of land and if some of them do not participate total product would not diminish. In other words, many members marginal contribution or marginal product is zero. They are surplus labour.
Units of Labour Fig. 4.3
OX represents units of labour and OY total crop produced. OC is total product curve. Upto OA units of labour total product will go on increasing with more employment. After that (OA) all units of labour are unemployed as their employment do not increase total product. As they are not producing anything additional, they are unemployed. But this unemployment is not visible in the naked eye as they are going to cultivate.
Theory of Employment
The causes of such joblessness are – (a) family farming (b) existence of surplus labour (c) lack of alternative job facilities. The growth of capitalist sector can absorb such surplus manpower. And rural development activities initiated by the government can also eradicate this type of unemployment. Industrial nations face generally two types of unemployment; technological and cyclical Technological unemployment arises out of a change in the techniques of production from labour intensive to capital intensive. Further the industrial sector also faces a type of unemployment called cyclical unemployment. In times of recession and depression industries experience a fall in the volume of production. Therefore the demand for labour also decreases. Even some of the workers already employed are thrown out of employment. Another type of unemployment is Frictional unemployment. Such unemployment happens when the workers leave one job to get a better one. So it is also temporary. There is also Natural rate of unemployment that every country faces. Some men everywhere remain jobless for some reason.
4.4 THE CONCEPT OF FULL EMPLOYMENT
The concept of Full employment has been variously defined by different writers. Sir William Beveridge has defined it as having always more vacant jobs than men. Lord Keynes says it the absence of involuntary unemployment. So defined, the concept of full employment is compatible with (a) voluntary un employment, (b) frictional un employment. Thus a full employment economy is one which has the minimum of involuntary un employment in transition from one job to some other. It implies a situation whereby the labour market transforms from a buyers market to a sellers market. The Policies for achieving Full Employment The classical economists believed that an economy achieves full employment automatically. If supply creates its own demand, as stated by Say, an stated by Say, an economy can go on producing till all factors are fully absorbed, provided wages and prices are flexible. Thus general over production and unemployment were ruled out. A state of full employment was supposed to be inevitable. There may be under employment equilibrium. It is the level of income (OY1) in total income is equal to total expenditure of goods and services (Y = C + I). A M, C + I curve intersects the 45o curve. That is equilibrium point but at that level of income, the economy is under full employment. A126 ECONOMICS
Then, how to achieve full employment? Graphically if C + I curve shifts upwards and intersect Y = C + I curve at a point (P) that level of income (OY2) all labour may be fully employed. It is how full employment may come about (see graph 4.1) It thus appears that the way to achieve full employment is a constant increase in total expenditure (C + I) whose deficiency keeps an economy at less than full employment. Any policy for realizing this goal should attempt to raise total spending. When private spending for consumption and investment goods are inadequate, the government is called upon to play a more positive role i.e. to spend more by printing new money. Role of Government A vigorous “monetary fiscal mix” i.e., a combination of monetary policy and fiscal policy is essential for lifting an economy from depression and unemployment to full employment. Anti cyclical monetary policy It is formulated by the Central bank. It is known as Cheap Money Policy. Money is said to be ‘cheap, when it can be obtained at a very low rate of interest. If liquidity preference function remains unchanged, an increase in total money supply (cash + credit) will go to reduce interest rate. Naturally investment expenditure of the private sector will go up. A fall in interest rate will lead to a rise in price of bonds, securities etc. This will increase household sector’s investment in financial assets too. The Net National Product, in effect, will go up. Increase in money supply may continue till NNP reaches the full employment level. So long there are unemployed factors, injection of more money will lead to an increase in output and employment. Investment of created money will activate the idle factors. In this way once the economy reaches full employment zone, any more increase in money will lead to inflationary price rise. At less than full employment, investment may activate idle resources. So an increase in NNP. But at full employment there lies no such scope. Thus an increase in investment may generate an ‘output effect’ at less than full employment situation and ‘price effect’ after (or at) full employment level of output.
Y F C
Theory of Employment
In this graph OX represents money supply and OY NNP. The ray passing through the origin is Price Curve. OQ is Total Product curve. Upto OM increases in money supply will to on increasing output (AM1, BM2, CM3 ……) Once full employment is achieved (DM) the curve becomes inelastic (DQ) Henceforth more money will lead to proportionate increase in price. Fiscal Policy Government’s tax and expenditure policy for realizing the goal of full employment is compensatory in nature. It seeks to compensate the shortfall in private spending (C + I) which is supposed to be the cause of deviation from full employment. Fiscal policies need to be two edged – taxing less and spending more. Taxing less is same as ‘leaving more in the hands of the people’ so that they can spend more. Expenditure by government for public works or welfare activities may raise private effective demand, also. The new and excess government outlay injected into body economy may generate an income more than the initial sum pumped in. Hence, Keynes advocated creation of “new” money by the government. The easiest way to do so is to borrow money from central bank against its securities. This method is known as Deficit Spending. Limitations 1) 2) It may retard private investment. Easy and cheap credit may be harmful to the business sector as they will find no incentive to raise resources internally. More spending by the government may raise the effective demand of ‘few’ and the effective demand of many may remain unchanged. So the character of effective demand is as important as its level. A vast public expenditure may not achieve full employment of labour for shortage of some complementary resources like technical personnel, foreign exchange etc.
Definition Unlike Land and Labour, Capital is not an original factor of production. It is said to be a produced means of production. It is means of production produced by labour on resources supplied by Nature. As a factor of production, Capital thus depends upon both Land and Man. It is known as producers’ goods – goods that help further production. In a broad sense, Capital implies physical goods like machines and tools that render repeated service in production. It also means money capital and debt capital consisting of equity and bonds which yield income. Thus capital includes all those physical and financial assets that yield an income or aid the production of income. Man invests in Capital assets for the sake of obtaining income repeatedly. Nowadays man is also considered as a sort of capital. Just as A128 ECONOMICS
physical and finance capital brings income after their owner invest fund, so also investment in human capital in the form of education makes a man skilled worked and he earns more repeatedly. As an agent of production capital increases the productivity of labour. Man can produce more when he uses sophisticated machines and tools. Not only does its use raise the volume of output but secures continuity in production also. Further the use of capital makes production ‘round about’. Labour first produces capital goods like machines and tools and then with the help of such goods, consumption goods are produced. Capital helps in bringing about continuity in production. Growth of Capital Physical Capital and Financial Capital are essential for production. The more the stock of capital, the more will be the volume of production in an economy. This highlights the need for the growth of capital in a country. Capital grows out of savings. It implies generation of surplus – a surplus of income over consumption. The size of the surplus that forms capital is the difference between current income and current consumption. Therefore the growth of capital depends on the size of income and the proportion of income spent for consumption. Surplus is generated from household sector, corporate sector and the Government sector. Of these the role of the household sector in generating surplus is very much important in most of the countries of the world. Saving may be of three types—voluntary saving, involuntary saving and forced saving Generally the households save a part of their current income voluntarily in the sense that they may not save it also if they so like. Some times savings becomes involuntary. In a period of inflation, as prices of goods used by household increases so with their fixed income they can now consume less than before. Naturally there is saving but it is not voluntary. Thirdly, people are forced to reduce consumption out of a given income if a large part of the income is taken away by the Government in the form of direct taxes. It is the case of forced saving. Saving of the house hold sectors are related to family income and family consumption expenditure. It is only when people abstain from current consumption, that they are able to save and such saving helps the growth of capital. The propensity to save of the household sector depends upon a variety of factors. The business sector also creates surplus. The surplus of the capitalist sector is reinvested in physical assets for further production and employment. According to Lewis the growth of capital is low in poor countries not because their people are poor but because their capitalist sector is so small. Growth of capital thus depends upon the growth of large scale industries that generate large amount of surplus for further investment.
Theory of Employment 4.6 CAPITAL FORMATION
Capital formation means the process whereby a nation creates capital assets that generate a continuous flow of income in future. The creation of such capital assets involves large scale investments and such investable resources come from surplus. Thus the essence of capital formation is creation of surplus or savings. Surplus generation is possible only when the nation does not use the entire production for current consumption but keeps a part of it for future production thus capital formation needs current sacrifice for future prosperity that is to-day’s pain for tomorrow’s gain. In a word Capital Formation is the process of creation of savings and its productive investment. In a wider context the formation of capital thus not merely means the growth of savings and investment but a qualitative change in man’s attitudes and motives that may help development in the long run. Prof. W.W. Rostow opined, “capital formation is not merely a matter of maximizing profit. It is a matter of a society’s effective attitude towards science, applied science, risk taking as well as the adaptability of the working force”. Thus capital formation has a quantitative as well as a qualitative aspect. The former is the growth of investment resources while the latter involves a qualitative change in human resources. Steps in Capital Formation Capital formation is a long drawn process. It passes through three important stages. The first step in Capital formation is Creation of Surplus. Simply speaking, creation of surplus means increasing the ratio of saving to income. Out of a given income a country should save more if it want s to generate surplus. Savings can be increased in two ways. If the level of personal income increases some increase in savings is quite natural. Saving can also increase if people abstain from current consumption to a larger extent. While the ability to save depends upon the size of a man’s income, his family liabilities, his standard of living etc., it also depends upon his willingness to save. The willingness to save is influenced by some personal qualities that motivate a man to save and these motives may vary from person to person. Not only the household sector but also the corporate sector and the public sector can contribute to the creation of savings. A Budgetary surplus is an important source of surplus generation in the Government sector. The private corporate sector too can contribute to surplus generation if they operate with efficiency. Thus the most important condition for Capital Formation is Creation of Surplus. The second step is mobilization of the surplus created. It implies the surplus resources should be activated and they should not remain idle. Mobilisation of savings depends upon the financial network of an economy. Banks and other financial institutions play an important role in the 1. 2.
mobilization process. These institutions collect the surplus from the surplus units and lend them to the deficit units like businessmen, industrialists, traders etc. who are in need of fund. Thus they play an intermediary role connecting savers with the users of capital. The Financial systems can mobilize capital actively if they are safe and sound. The interest rate they offer may induce people to save more and to deposit it with the financial institutions. Thus the financial system of a country plays an important role in capital formation. The last step in capital formation is effective investment of the surplus. Funds offered by financial institutions are taken by those who invest them with the object of earning income, from investment of such funds in trade, commerce and industry. If the borrowed fund is used for unproductive and speculative purposes, it may bring windfall profit but without helping the creation of capital assets for future income. Such investment is not desirable. What is essential is that money must be invested for productive purposes – purposes from which the investor can get a continuous earning over a period of time.
1. 2. 3. 4. 5. 6.
What does the Keynesian Theory of Employment? What is investment functions? Describe the causes and types of unemployment. What is disguised unemployment? What is the meaning of full employment? What is the meaning of monetary and Fiscal policy?
7. Explain the Malthusian Theory of Population. Compare and Contrast this theory with the Optimum Theory of Population. 8. Define Capital. How does it differ from Land? What are the forms of Capitals? 9. What is meant by Capital formation. Discuss the steps in Capital formation?
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