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Employment
The principle of effective demand lies at the heart of Keynes general
theory of employment. The dictum of the theory is that the volume of
employment depends on the level of effective demand in an economy.
A corollary, thus, may be drawn that unemployment is due to a
deficiency of total demand (i.e., effective demand). Hence, Keynes
employment theory may be described as the demand efficiency theory.
Broadly speaking, Keynes designated the term effective demand to
denote the total demand of goods and services (both for consumption
and investment) by the people in a community. In a money economy,
thus, effective demand manifests itself in the spending of income or
the flow of expenditure.
The flow of expenditure in turn determines the flow of income, as one
mans spending becomes the income of another. In real terms, the
expenditure flow in a community consists of consumption expenditure
and investment expenditure expressing the total demand for goods
and services. To meet such demand, people are employed either in
producing consumption goods (consumption demand) or in producing
capital goods (investment demand).
Employment increases only when the total demand either from the
consumption side or from the investment side increases. A
fundamental principle is that consumption increases with an increase
in income, but less proportionately. As a result, there will be a widening
gap between income and consumption; hence to sustain the flow of
expenditure, the gap must be filled up by appropriate investment
expenditure.