Output & Employment Determination  

Output and Employment Determination is a fascinating area in economics that explains how the level of output and employment in an economy is decided. Two key schools of thought—Classical and Keynesian—offer different perspectives on this. The Classical approach assumes that markets are always in equilibrium, with full employment prevailing as wages and prices adjust freely. In contrast, the Keynesian view suggests that economies can get stuck in underemployment or recession, with output and employment dependent on aggregate demand.

Central to these theories are the Investment and Consumption Functions, which explore how household spending (consumption) and business spending (investment) influence the overall economy. The Multiplier effect comes into play here, illustrating how an initial change in investment or government spending can lead to a larger change in national income.

Another important concept is the Accelerator theory, which links investment to changes in demand for goods and services. When demand increases, businesses are motivated to invest more, boosting both output and employment.

Together, these theories and concepts help us understand the delicate dance between production, consumption, and investment, and how shifts in these areas can determine the health of an economy.