KEYNESIAN APPROACH TO CURRENT ACCOUNT The main root of this part is pioneered by John Keynes in 1930’s in efforts to comprehend the undergoing condition of great depression. From 1930’s on the time of depression there was no economic theory that could provide explanations for the severe worldwide economy collapse. John Keynes a British economist who became very famous after the establishment of his book called ‘The general theory of interest, economy and money’ in 1936, forefront a rebellion in economic thinking that reversed the dominant idea that free market would provide full employment (Keynes 1936). He further identifies that there is no balance mechanism to ensure free market result into full employment. Also, he justifies that government
Frictional unemployment Frictional unemployment is transitional unemployment due to people switching between jobs, either because they have been made redundant or are looking for new employment. It may also be called ‘search unemployment’ as it relates to the time taken to search for new job. Frictional unemployment
Unemployment is a vital issue in developing economies. When there is a high rate of unemployment, it refers that labour resources are not being utilized efficiently and full employment must be a major goal of any government because it maximizes the production. Okun’s (1962) states that a one percent point reduction in unemployment rate would increase output up to 3 percent. Therefore, the economy must continually expand to avoid the waste of unemployment. In achieving macroeconomic goal which is full employment, the condition is must be fulfilled by using all the resources such as labor, land, capital and entrepreneurs for produce the output of goods and services.
Hayek’s explanation of an economy’s business cycle “The Austrian Business Cycle”: In his book “Prices and Production”, Hayek’s argued that any business cycle commence as a result of a monetary policy or approach that is adopted by governments. Hayek agreed with Adam’s Smith theory of free markets. He argued that despite the fact that markets evolved over time as a result of human actions, at a certain stage markets fail resulting in unemployment and inefficient allocation of resources. On analyzing the factors behind markets failure, Hayek suggested that the reason behind fluctuations in the stability of markets was the intervention of governments in the monetary equilibrium of economies. There he argued for a monetary approach to the origins
Neoclassical Theory provides the intellectual basis for neoliberal regional policy. As it was mentioned before, overtime the unevenness that neoclassical theory will eventually disappear, therefore the government will not do anything about the spatial inequality. If the government has to intervene, the measure that is needed for the market to do is to improve the functioning of factor markets, for example, by improving workers knowledge of employment opportunities in other regions. The second theory of Uneven Development is The Disequilibrium Theory. This theory is associated with the Swedish Economist, Gunnar Myrdal who argued that economic change is most likely to be characterised by positive feedback effects rather than negative feedback.
Friedman based his work on the intuition that income is more volatile than consumption. Consumption is based on long-term expectations about income since households prefer to smooth consumption over time and avoid short-term fluctuations (Meghir, 2004). The implication of this theory on household behavior is that household will save today if their income is higher than the future and vice versa. For example, in economic crises current income becomes lower than future income so people dissave to cover current consumption (Berry, Williams, & Waldron,
Keynes’s idea on the subject is that “It is evident from the above that the level of employment at any time depends, in a sense, not merely on the existing state of expectation but on the states of expectation which have existed over a certain past period” (Keynes, 1936, p. 50). This does not mean that time must be included as an explanatory variable since “time” is not an exogenous variable germane to economic performance; what is exogenous is not “time” but the dynamic process that directs producers’ and consumers’ decisions to some theoretical realisation. This process obviously takes time, but it is an exogenous phenomenon in itself that most probably has no regular time performance suitable to time series
Frictional unemployment or search unemployment is often considered to be a short-term version of unemployment but is always existing or present. Frictional unemployment can be considered a positive indicator and beneficial of the economy as individuals are seeking superior employment opportunities and flooding the applicant pools with