SAMARA UNIVERSITY

College Of Business and Economics

Department of Economics

THE ROLE OF WOMEN PARTICIPATION IN

INCOMEGENERATIG ACTIVITY (IN THE CASE OF
SANJAWOREDA)
ARESEARCH PROPOSAL SUBMITTED TO THE DEPARTMENT OF ECONOMICS IN
PARTIAL FULFILLMENT FOR THE BACHOELOR OFART DEGREE IN ECONOMICS

By: ATIBIYANESH BIRHAN

ID NO: SU/1202164
TO ADVISOR AWEL MOHAMMED

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1.Analyze the fundamental mistakes committed by classic
economists in their theoires according to keynes?

Keynes also attacked the classical theory in regard to saving and investment. He
objected to the classical idea of saving and investment equilibrium through
flexible rates of interest. To him saving and investment equilibrium are obtained
through changes in income rather than in the interest rate.

Keynes criticised the classical assumption of self-regulating economy.

The great depression of 1930s led Keynes to believe that full employment
equilibrium in the economy was not be automatically achieved in the short
period; and that government intervention was necessary to tackle the problem
of the

1. Unrealistic Assumption of Full Employment Condition:

ADVERTISEMENTS:

Keynes considered the fundamental classical assumption of full employment equilibrium

condition as unrealistic. To him, there is the possibility of equilibrium condition of
underemployment as a normal phenomenon. Keynes regarded it as a rare phenomenon. Keynes
in fact considered the underemployment condition of equilibrium to be more realistic.

2. Undue Importance to the Long Period:

Keynes opposed the classical insistence on long-term equilibrium; instead, he attached greater
importance to short-term equilibrium. To him, “in the long run, we are all dead.” So, it is no use
to say that in the long run everything will be all right.

3. Keynes’ Denial of Say’s Law of Markets:

Classical economists rest on Say’s Law which blindly assumed that supply always creates its
own demand and affirmed the impossibility of general overproduction and disequilibrium in the
economy. Keynes totally disagreed with this view and stressed the possibility of supply
exceeding demand, causing disequilibrium in the economy and pointed out that there is no
automatic self-adjustment in the economy.

He further pointed out the weakness of Say’s Law maintaining that all the income earned by the
agents of production during the process of production would not necessarily be used to purchase
the goods produced; hence there can be a deficiency of aggregate demand.

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ADVERTISEMENTS:

Unemployment, according to him, is the result of deficiency of aggregate demand. He conceived

that the entire part of money income which is not spent on consumption goods by individuals,
need not necessarily be spent on the purchase of producers’ goods or investment goods; money
saved is often hoarded by individuals to increase their cash balances. Therefore, there can be
shortage of aggregate demand. Evidently, additional supply does not necessarily mean additional
demand.

Further, Say’s Law laid down that supply and demand would always be in equilibrium and the
process of equilibrium was automatic and self-balancing. Keynes refuted this too. He pointed out
that the structure of modern society rests on two principal classes — the rich and the poor — and
there is unequal distribution of wealth between them.

The haves have too much of wealth all of which cannot be consumed by them and the have-nots
too little even to meet their minimum consumption, which means a deficiency in aggregate
demand in relation to additional supply, and this results in general overproduction and
unemployment.

Thus, Keynes pointed out the error of the classicists in denying general overproduction and
unemployment. He also pointed out that the economic system in reality is never self-balancing in
character. He, therefore, maintained that State intervention is necessary for adjustment between
supply and demand in the economy.

1. Keynes Rejected the Fundamental Classical Assumption of Normal, Automatic

Full Employment Equilibrium in the Economy:

He considered it as unrealistic. He regarded full employment as a special situation.

He observed that the general situation in a capitalist economy is one of underemployment.

This is because the capitalist society does not function according to Say’s law especially during
depression when aggregate supply exceeds its demand.

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We find during depression that millions of workers are prepared to work at the current wage rate,
and even below it, but they do not find work. Thus the existence of involuntary unemployment in
capitalist economics (entirely ruled out by the classicists) proves that underemployment
equilibrium is a normal situation and full employment equilibrium is just a chance.

Ground # 2. Keynes Refuted the Say’s Law of Markets with the help of his
Theory of Effective Demand:

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He maintained that all income earned by the factor-owners would not be spent in buying
products which they help to produce. A part of the earned income is saved and is not
automatically invested because saving and investment are done by two entirely different groups
of people.

So when all income is not spent on consumption goods and a portion of it is saved and not
invested their results a deficiency of aggregate demand. This leads to general overproduction
because all that is produced is not sold. This, in turn, leads to general unemployment. Thus
Keynes invalidated Say’s Law by invoking the principle that all saving is not automatically
invested.

Ground # 3. No Automatic Working of the Price Mechanism:

Keynes did not agree with the classical view that the laissez faire policy was essential for an
automatic and self-adjusting process of achieving full employment equilibrium. He pointed out
that the free market capitalist system was not automatic and self-adjusting because of the way
some capitalist institutions function on profit-motive alone.

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There are two principal classes, the rich and the poor. The rich possess much wealth but they do
not spend the whole of it on consumption. The poor do not have money to purchase consumption
goods. In times of prosperity, the incomes of the rich rise much more than the incomes of the
poor.

Thus there is general deficiency of aggregate demand in relation to aggregate supply which leads
to overproduction and unemployment in the economy.

This, among other reasons, led to the Great Depression. Had the capitalist system been automatic
and self-adjusting this depression would not have occurred. Keynes, therefore, advocated state
intervention for adjusting aggregate supply and demand in the economy through fiscal and
monetary measures.

Ground # 4. Investment is Equated to Saving by Changes in Income:

The classicists believed that saving and investment were equal at the full employment level and
in case of any divergence, equilibrium was brought about by changes of the rate of interest.
Keynes held that the level of saving depended upon the level of income and not on the rate of
interest. Similarly investment is determined not so much by rate of interest as by the marginal
efficiency of capital.

ADVERTISEMENTS:

A low rate of interest cannot increase investment if profit expectations are low. If saving exceeds
investment, it means people are spending less on consumption. As a result, demand declines.

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There is overproduction and the failure to sell goods results in fall in investment, income, and
output.

It leads to reduction in saving to the level at which investment falls. Thus it is variations in
income rather than changes in interest rate that brings about equality between saving and
investment.

Ground # 5. Inadequate Analysis of the Demand for Money:

The classical economists believed that money was demanded only for transactions and
precautionary purposes. They did not recognise the speculative demand for money because they
thought it irrational as money held for speculative purposes related to idle balances. But Keynes
did not agree with this view. He emphasised the rationality of speculative demand for money.

He pointed out that the cost of assets meant for transactions and precautionary purposes may be
very small at a low rate of interest and therefore the demand for active balances may be low. But
the speculative demand for money would be infinitely large at a low rate of interest.

Thus the rate of interest will not be allowed to fall below a certain minimum level, where the
speculative demand, for money would become perfectly interest- elastic. This is Keynes’s
‘liquidity trap’ situation which Keynes considered as the real situation in the depths of the Great
Depression.

Keynes pointed out that it was possible for saving to exceed investment while the rate of interest
was positive. The liquidity trap prevents the rate of interest from falling below certain minimum
level. This may prevent the equality of saving and investment at full employment.

This is illustrated in Figure 3.5 where SS is the saving curve and II the investment curve. If the
liquidity trap occurs at Or1 rate of interest, it would prevent the interest rate from falling to Or
level and the equality between saving and investment will not be brought about at point E.

At the liquidity trap level of the rate of interest Or1 saving exceeds investment by i1S1. So the
economy will not achieve equilibrium at the full employment level shown at the point E where
saving and investment are equal but at underemployment equilibrium level of the rate of interest
Or, where saving exceeds investment.

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Keynes’s argument has been further developed by Patinkin who maintains that even if the rate of
interest were to fall to zero; there would still be an excess of saving over investment. This is
because even when there is deep depression people save for security reasons and hold idle
balances when the general price level falls. This is also explained in Figure 3.5 where the curve
II has shifted to the extreme left as I 1I 1 – showing the decrease in investment.

ADVERTISEMENTS:

Such a possibility exists under a depression. At zero interest rate saving exceeds investment by
i0s0. Patinkin says that under depression conditions, it may be that full employment is obtained at
a negative rate of interest. In the figure, the classical saving and investment curves intersect at
point E’ where the rate of interest Or’ is negative. This is an impossible policy proposition for a
depressed economy because the rate of interest can never be negative in practice.

Ground # 6. Money Influences Output and Employment:

The classical economists regarded money as neutral. Therefore they had separated the theory of
output, employment and interest rate from the monetary theory. According to them, the level of
output and employment, and the equilibrium rate of interest were determined by real forces.

Keynes criticized the classical view that the monetary theory should be treated as separate from
the value theory. He tried to integrate monetary theory with value theory, and brought the theory
of interest within the domain of monetary theory (by regarding the interest rate as a monetary
phenomenon).

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This lie attempted by forging a link between the quantity of money and the price level via the
rate of interest. We state Keynes’s argument briefly: when the quantity of money increases, the
rate of interest falls, investment increases, income and output increases, demand increases, factor
costs and wages increase, relative prices increase, and ultimately the general price level rises.

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Ground # 7. Keynes refuted Professor Pigou’s Contention that a Cut in Money
wage could Achieve Full Employment in the Capitalist Economy:

The greatest fallacy in Pigou’s analysis, Keynes pointed out, was that he extended the argument
to the economy which was only applicable to an individual industry. Reduction in wage rate can
increase employment in an industry by reducing costs and increasing demand.

But the adoption of such a policy for the economy as a whole leads to a reduction in
employment. When there is a general wage-cut, the income of the workers as a class is reduced.
As a result, aggregate demand falls leading to a decline in employment.

From the practical policy viewpoint also Keynes never favoured a wage-cut policy. Since
workers have formed strong trade unions, which resist a cut in money wage, they would resort to
gherao, go-slow tactics and even strikes. The consequent unrest in the economy would bring a
decline in output and income.

ADVERTISEMENTS:

Keynes also did not accept the classical assumption that there was a direct proportionate
relationship between money wages and real wages. According to him, for the economy as a
whole there is an inverse relation between the two. When money wages fall, real wages rise and
vice versa.

Therefore, a reduction in the money supply would not reduce the real wage and reduce more
employment simply because effective demand would not improve through wage cutting.

Keynes, however, believed that employment could be increased more easily through monetary
and fiscal measures rather than by reduction in money wage. Moreover, institutional resistances
to wage and price reductions are so strong that it is not possible to implement such a policy
politically.

Ground # 8. State Intervention is Necessary for Economic Stability:

Keynes did not agree with Pigou that “frictional maladjustments alone account for failure to
utilise fully our productive power.” The capitalist system is such that left to itself it is
incapable of using its productive powerfully.

Therefore, state intervention is necessary both for efficiency and stability. The government has
many options. The state may directly invest to raise the level of economic activity or to
supplement deficient private investment. It may pass legislation recognising trade unions, fixing
minimum wages and providing relief to workers through social security measures. We are now
living in welfare states. “Therefore”, as observed by Dillard, “it is bad politics even if it should
be considered good economics to object to labour unions and to liberal labour legislation.”

Ground # 9. Importance of the Short-run Problems:

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The classicists believed in the automatic establishment of long-run full. Employment equilibrium
through a self- adjusting process. Keynes maintained that society had no patience to wait for the
long period, for the common man believes that “In the long-run we are all dead. As pointed by
Schumpeter. “His philosophy of life was essentially a short-term philosophy.” His analysis is
confined to short-run phenomena.

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Politicians making policy choices attach more importance to short-run problems. Classical policy
proposals were not acceptable to them as these would take a long time to work out their way.
The classical macro model might have been quite logical on its assumptions and policy
prescriptions. But it was unfit for short-term macro analysis and policymaking. Keynes had good
reasons to reject classicism.

In conclusion it may be pointed out the classical model had an inconsistency. It tried to separate
the real sector from the monetary sector. The pricing process in the real (goods) sector was
separated from that in the monetary sector through the assumption of neutrality of money.

2 Give abrief outlineof keynesia theory of employment

Keynes’ theory of employment is called the effective demand theory of

employment. According to this theory, unemployment arises due to the
deficiency to effective demand and the method of remove unemployment is to
raise effective demand.

The main point related to starting point of Keynes theory of employment is the principle of
effective demand. Keynes propounded that the level of employment in the short run is
dependent on the aggregate effective demand of products and services.

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According to him, an increase in the aggregate effective demand would increase the level of
employment and vice-versa. Total employment of a country can be determined with the help of
total demand of the country. A decline in total effective demand would lead to unemployment.

As per Keynes theory of employment, effective demand signifies the money spent on the
consumption of goods and services and on investment. The total expenditure is equal to the
national income, which is equivalent to the national output. Therefore, effective demand is equal
to total expenditure as well as national income and national output.

The effective demand can be expressed as follows:

Effective demand = National Income = National Output

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ADVERTISEMENTS:

Therefore effective demand affects employment level of a country, national income, and national
output. It declines due to the mismatch of income and consumption and this decline lead to
unemployment.

With the increase in the national income the consumption rate also increases, but the increase in
consumption rate is relatively low as compared to the increase in national income. Low
consumption rate leads to a decline in effective demand.

Therefore, the gap between the income and consumption rate should be reduced by increasing
the number of investment opportunities. Consequently, effective demand also increases, which
further helps in reducing unemployment and bringing full employment condition.

Moreover, effective demand refers to the total expenditure of an economy at a particular

employment level. The total equal to the total supply price of economy (cost of production of
products and services) at a certain level of employment. Therefore, effective demand refers to the
demand of consumption and investment of an economy.

Determination of Effective Demand:

Keynes has used two key terms, namely, aggregate demand price and aggregate supply price, for
determining effective demand. Aggregate demand price and aggregate supply price together
contribute to determine effective demand, which further helps in estimating the level of
employment of an economy at a particular period of time.

In an economy, the employment level depends on the number of workers that are employed, so
that maximum profit can be drawn. Therefore, the employment level of an economy is dependent
on the decisions of organizations related to hiring of employee and placing them.

The level of employment can be determined with the help of aggregate supply price and
aggregate demand price. Let us study these two concepts in detail.

Aggregate Supply Price:

Aggregate supply price refers to the total amount of money that all organizations in an economy
should receive from the sale of output produced by employing a specific number of workers. In
simpler words, aggregate supply price is the cost of production of products and services at a
particular level of employment.

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It is the total amount of money paid by organizations to the different factors of production
involved in the production of output. Therefore, organizations would not employ the factors of
production until they can recover the cost of production incurred for employing them.

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A certain minimum amount of price is required for inducing employers to offer a specific
amount of employment. According to Dillard, “This minimum price or proceeds, which will just
induce employment on a given scale, is called the aggregate supply price of that amount of
employment.”

If an organization does not get an adequate price so that cost of production is covered, then it
employs less number of workers. Therefore the aggregate supply price varies according to
different number of workers employed. So, aggregate supply price schedule Id Tut can be
prepared as per the total number of workers employed.

Aggregate supply price schedule is a schedule of minimum price required to induce the different
quantities of employment. Thus, higher the price required to induce the different quantities of
employment, greater the level of employment would be. Therefore, the slope of the aggregate
supply curve is upward to the right.

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Aggregate Demand Price:

Aggregate demand price is different from demand for products of individual organizations and
industries. The demand for individual organizations or industries refers to a schedule of quantity
purchased at different levels of price of a single product.

On the hand, aggregate demand price is the total amount of money that an organization expects
to receive from the sale of output produced by a specific number of workers. In other words, the
aggregate demand price signifies the expected sale receipts received by the organization by
employing a specific number of workers.

Aggregate demand price schedule refers to the schedule of expected earnings by selling the
product at different level of employment Mo higher the level of employment, greater the level of
output would be.

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Consequently, the increase in the employment level would increase the aggregate demand price.
Thus, the slope of aggregate demand curve would be upward to the right. However, the
individual demand curve slopes downward.

The basic difference between the aggregate supply price and aggregate demand price should be
analyzed carefully as both of them seem to be same. In aggregate supply price, organizations
should receive money from the sale of output produced by employing a specific number of
workers.

However, in aggregate demand price, organizations expect to receive from the sale of output
produced by a specific number of workers. Therefore, in aggregate supply price, the amount of

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money is the necessary amount that should be received by the organization, while in aggregate
demand price the amount of money may or may not be received.

The following are the main features of the Keynesian theory of employment which
determine its basic nature:

(i) It is general theory in the sense that- (a) it deals with all levels of employment, whether it is
full employment, widespread unemployment or some intermediate level; (b) it explains inflation
as readily as it does unemployment, because basically both situations are a matter of volume of
employment, and (c) it relates to changes in the employment and output in the economic system
as a whole.

(ii) Keynesian theory of employment is a short-run theory which attempts to analyse the short-
run phenomenon of unemployment. He assumed constant all those strategic variables which
remain stable and change very little in the short-run.

(iii) Keynesian theory is based on empirical foundations and has important policy implications.

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(iv) Keynes did not have much faith in the policy of laissez faire and automatic adjustment of the
economic system. On the contrary, he advocated government intervention to reform the capitalist
system.

(v) In this theory, Keynes gave money specially an important role in the determination of
employment and output in the economic system as a whole.

Assumptions of the Theory:

Keynesian theory of employment is based on the following assumptions:

(i) Keynes confines his analysis to the short-period.

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(ii) He assumes that there is perfect competition in the market.

(iii) He carries out his analysis in the closed economy, ignoring the effect of foreign trade.

(iv) His analysis is a macro-economic analysis, i.e., it deals with aggregates.

(v) He assumes the operation of the law of diminishing returns or increasing costs.

ADVERTISEMENTS:

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(vi) The government is assumed to have no part play either as taxer or a spender, i.e., the fiscal
operations of the government is not explicitly recognised.

(vii) He assumes that labour has money illusion. It means that a worker feels better when his
wages double even when prices also double, thus leaving his real wage unchanged.

3 .Explain the liqudityprefernce theory of keynes

John Maynard Keynes' liquidity preference theory concentrates on the demand and supply for
money as the interest rate determinants. According to his proposition that interest rate is the price
paid for borrowed money, people will rather keep cash with themselves than invest cash in
assets. Hence, people have a preference for liquid cash. People also intend to save a percentage
of their income. The amount that will be held in the form of cash and the amount that will be
spent depends on liquidity preference. People will prefer to hold cash since it is the most liquid
asset and the reward for parting with liquidity is interest, whose rate according to Keynes' is
determined by the economic demand and supply of money. Here are some important things to
know about liquidity preference;

 The Liquidity preference theory which was developed by John Maynard Keynes states that the
interest rate is the price for money.
 This shows the relationship between the interest rate and the quantity of money the public
wishes to hold.
 According to Keynes, the demand for liquidity is determined by three motives which are,
transactional motives, precautionary motives and speculative motives.
 The theory suggests that cash is the most accepted liquid asset and more liquid investments are
easily cashed in for their full value.
 It proposes that people will rather keep cash with themselves than invest cash in assets.
 When higher interest rates are offered, investors give up liquidity in exchange for higher rates.

According to John Maynard Keynes, the demand for liquidity is determined by three motives:
Transactional motive: people prefer to have the liquidity to ensure that they can take part in
necessary basic transactions because their income is not always available. Precautionary motive:
people prefer to have liquidity in order to be able to meet social unexpected problems that need
unusual costs. The higher the income, the higher the quantity of money demanded for this
purpose. Speculative motive: in order to speculate a fall in the prices of bonds, people retain
liquidity. A decrease in the interest rate results in an increase in the quantity of money demanded
by people until interest rates rise.The liquidity preference theory of interest is a theory of money
that explains the monetary nature of the interest rate. Keynes explained that liquidity preference
influences the interest rate rather than the saving decision. He believed that money or liquidity is
necessary for economic activity in monetary production economies compared to savings.

The individual decides the portion for spending and reserve for future consumption based on
income. Also, factors like psychology, uncertainty in the future, and the economy’s structure
influence the portion for spending. When it comes to saving for the future, people can hold in the
form of cash or investment in interest-bearing assets.

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Keynes portrayed the liquidity preference model in terms of three motives:

Transactions Motive

It highlights the people’s choice to prefer liquidity for their day-to-day expenses or normal
transactions. Investors like to have the liquidity to ensure their short-term obligations rather than
struggling or borrowing. The amount of liquidity is directly proportional to the income level. The
higher the income is, the more it is used for increased spending. Paying rent, buying groceries,
and managing bills are short-term obligations.

Precautionary Motive

Cash plays an important role in everyone’s life, specifically in times of crisis and emergencies.
Precautionary demand reflects the need to cover abrupt expenditures, contingencies, or
unforeseen opportunities. Hence this is another motive explained by the liquidity preference
theory for retaining cash.

Speculative Motive

Speculative motive explains people’s intention to gain speculative profit utilizing changes in
interest rates. If the interest rate is low or investors may have a higher demand for liquidity,
anticipating a future increase in interest rates, they hold cash for future investment.

Income rather than the interest rate primarily influence the transaction and precautionary
motives. That is, they are relatively interested inelastic. Therefore, as income increases, cash
reserve for the transaction and precautionary motives increase and vice versa. On the other hand,
the speculative motive is interest elastic; it depends on the interest rate. Hence the speculative
motive and cash available to satisfy the speculative motive determine the interest rate.

4. What is the basic reason for emergence of post keynesian eonomics

Keynes believed that the Great Depression seemed to counter this theory. Output
was low, and unemployment remained high during this time. The Great Depression
inspired Keynes to think differently about the nature of the economy.Keynesian
economics is based on two main ideas. First, aggregate demand is more likely than
aggregate supply to be the primary cause of a short-run economic event like a recession. Second,
wages and prices can be sticky, and so, in an economic downturn, unemployment
can result.

For Keynesian economists, the Great Depression provided impressive

confirmation of Keynes's ideas. A sharp reduction in aggregate demand had

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gotten the trouble started. The recessionary gap created by the change in
aggregate demand had persisted for more than a decade

Keynesian economists believe that recessionary and inflationary gaps can

persist for long periods, they urge the use of fiscal and monetary policy to
shift the aggregate demand curve and to close these gapKeynesian economic
theory is a macroeconomic theory that advocates for increased government
spending and lower taxes to stimulate demand.s.

· Unemployment is subject to the whims of demand and therefore undesirable.

· Active stabilization policy is required to reduce the volatility of the business cycle.

· Inflation is less important than unemployment.

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