John Keynes's Approach To The Great Depression

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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…show more content…
Main arguments involve the theory fails in providing sufficient account of its dynamic properties such as ‘internal relations’ between policy makers and the agents (entrepreneur). Their main concern is, Keynes could elaborate in his theory which ways the group of agents that participate in trade will be able to integrate with the policy makers of host country so as to ensure maintenances of his ideas of effective demand in the economy (Jespersen and Madsen 2012: 50). After criticism of Keynes’s theory there exists another group successors of Keynes identified as Keynesians and post-Keynesians. Each group has its own way of analysing trade and its impact on current account of the country. Keynesians who are also known as neoclassical synthesis develop their theory which considers some of ideas from the general theory. In their theory they develop a view that in short run output is influenced by aggregate demand especially in some economic disastrous such as depressions (Felderer and Homburg 1992:…show more content…
Keynesians initiate a model and identify three categories that elaborate more on the formation of current account. These categories include saving investment balance approach, multiplier approach and absorption approach. In their model to current account they kept emphasis towards saving investment balance approach due to its reality and practicability (Hossain 1995: 1). In order to get some insight of current account let’s start consider the national income equation on expenditure; Y = C + I + G + X-M ………….. (i) Where Y is Income, C is Consumption, I is Investment, G is government expenditure and X –M is net exports (Hossain 1995: 9). We develop another identity of national income on the disposal side i.e. how income is earned and spent Y = C + S + T …………………. (ii) Where S is saving and T is taxes. In combining equation i and ii, Y and C are ruled out so the remain will look like X - M = (S – I) + (T – G)……………..
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