John Maynard Keynes (5th June 1883-21st April 1946) was one of the founders of modern macroeconomics. He was a British Economist, and he was in the Keynesian economics school of thought. His main contribution towards macro economics was the formulation of the Theory of Employment. His theory of employment opposed what the Classical Economists proposed.
In the theory of Employment, Keynes argues that the main cause for unemployment was insufficient expenditure in investment. Keynes argues that unemployment is as a result of rigidity in wages. The low demand for output and workers to perform a job causes involuntary unemployment. The classical economist did not recognize the involuntary unemployment. According to classical economist, a person who is not working is considered not to be in the labor force. To reduce the level of unemployment, Keynes proposed the use of fiscal and monetary policies. Fiscal policy involves government spending and taxation to control unemployment. Monetary policy involves controlling the amount of money in circulation. According to Markwell, nominal wages were more important than the real wage. The purchasing power of an individual depends on the amount of nominal wage and not the real wage.
Keynes also came up with the Theory of Money. In this theory, Keynes argues that the amount of savings and level of investment are determined independently. The amount of saving did not depend on interest rate rather it was influenced by changes in income. An increase in income would increase the level of savings. The relationship between the interest rate and the return on investment determined the level of investment in the economy. According to classical economist, the interest rate and investment level were a function of interest rate..
Milton Friedman (31st July 1912-16th November 2006) was an American economist. Milton Friedman came up with the theory of the quantity theory of money. The quantity theory of money is based on the Fisher Equation of exchange from the classical economists which equates the amount of money in circulation (M) and the velocity of the money circulation (V) to the average price level (P) and the number of transactions occurring (T). The equation can be written as MV=PT.
According to classical economists, the velocity of money remains stable as the number of transactions move towards full employment. Friedman improved on this theory and argued that velocity of money and the number of transactions are determined independently in the long run and this lead to the conclusion of a direct relationship between the amount of money in circulation and the price level. As money in circulation increases, the price level also increases.
According to Milton, inflation was brought about by the rate of growth of the money supply increasing than the rate output growth. According to Friedman, inflation had a negative impact in the economy. Some of the effects he highlighted include; low level of investment as a result of uncertainty created by inflation and destruction of international competition with rival companies caused by the high price level of the products as compared to the competitors’ price levels.
James Tobin (5th March1919-11th March 2002) was an American economist. James Tobin came up with the theory of money demand. The theory was also known as the risk aversion theory or the Tobin’s Portfolio Selection Model. According to Tobin, investors can diversify their portfolio. They can invest in bonds and at the same time hold some money in the form of cash. The rate of return on the investment determines their investment option.
In this theory, Tobin classified investors into three categories. The risk adverse investors, the risk neutral investors and risk takers or lovers. The risk neutral is an investor who does not want to risk. The risk neutral investors keep all their wealth either in the form of money or bonds. The risk lovers’ investors diversify their wealth. They invest all their wealth into bonds. The investors are risk takers. Risk adverse investors tend to avoid risk the associated with the uncertainty in the return on bonds. Risk adverse investors aim to maximize returns from their investment and minimize losses..
The Gross Domestic Product of a country is defined as the market value of all the goods and services which are produced in the country within a given period of time. GDP is obtained by taking the sum of the consumer spending, investment made by the country, government expenditure and net exports.
According to John, the composition of Gross Domestic Product by percentage involves determining the percentage contribution of each component of GDP to the total GDP. The percentage may also be calculated for each sector. For example, the percentage contribution of the agriculture sector to total GDP or the percentage contribution of the net exports to total GDP.
The Gross Domestic Product per capital is obtained by dividing the total GDP with the midyear population. In this case, the GDP per capita is230000/500000=0.46. The GDP per capita is 0.46. This implies that each person in the country contributes 0.46 towards total GDP. The Keynesian formula for computation of GDP is the same as what we have used above. The GDP and GDP per capita computed are consistent with the Keynesian formula..
The economy of the United States is at the recovery phase in the business cycle. As at the end of 2012, the GDP in the United States was 15681.5 billion. The smallest component of GDP is the net exports of goods and services. The largest component of GDP is the personal consumption of goods and services in United States. The fastest growing component of GDP in United States is the personal consumption expenditure. The increase in personal consumption expenditure may be due to the increase in nominal wage of the residents. An increase in income increases the demand for goods and services. This increases the consumption by individuals. Increase in personal expenditure may be caused by the increase in the output of goods and services in, United States. The increase in output leads to increase in exports and consumption by individuals in the country.
The price index is 115.71. The price index for GDP increased by 1.7% in 2012 while in, 2011, the price index had increased by 2.5%. The increased could have been caused by the increase in the amount of goods and services purchased in the United States. An increase in the demand for goods and services by individual increases the quantity purchased. In the previous section, we found that personal consumption expenditure increased in 2012 as compared to 2011. The increase could have caused an increase in the price index.
Works Cited
Eatwell, John and Murray Milgate. The Fall and Rise of Keynesian Economics. London: Oxford University Press, 2011.
Friedman, Milton. "Tradition, Milton Friedman’s Monetary Economics and the Quantity-Theory Tradition." Milton Friedman’s Monetary Economics and the Quantity-Theory Tradition (2009): 1-32.
Goldberg, Jan. The Department of Commerce. New York: The Rosen Publishing Group, 2005.
Keynes, John Maynard. General Theory Of Employment , Interest And Money. New York: Atlantic Publishers & Dist, 2006.
Markwell, Donald. John Maynard Keynes and International Relations: Economic Paths to War and Peace. New York: Oxford University Press, 2006.
Serletis, Apostolos. The Demand for Money: Theoretical and Empirical Approaches. London: Springer, 2001.
