Determination Of Output, Employment And Price

DETERMINATION OF OUTPUT, EMPLOYMENT AND PRICE

The level of economic activity in an economy is determined by aggregate demand and aggregate supply. There will no pressure for output, employment or price to change if aggregate demand = aggregate supply (AD AS) as shown in Figure 29. I. This relationship is discussed in Chapter 28.

Equilibrium output and the price level can also be stated to occur when total planned expenditure is just equal to the output that is actually produced i.e. C + I + G + (XвЂ"M) = Y. Figure 29.2 shows what is known as the 45Ð'o diagram. National income is measured on the horizontal axis and total planned expenditure, at different levels of GDP is measured on the vertical axis. GDP is in equilibrium at Y level of GDP If all the output produced is sold there is no reason for producers to change their output.

LEAKAGES =INJECTIONS:-

Figure 29.3 can be used to derive another formula for the equilibrium condition. GDP will only be stable when the total planned injections are equal to the total planned leakages.

In a four sector economy with a government sector and a foreign trade sector it is not a necessary condition for equilibrium that S should be equal to I, or that G be equal to T, or X be equal to M. The national output will be in equilibrium when:

Total planned injections =total planned leakages

J+G+X= S+T+M

Thus an excess of saving over investment may be offset by a budget deficit or an export surplus.

THE DETERMINATION OF EMPLOYMENT:-

Employment is influenced by the level of economic activity. When output rises, employment is also likely to rise. More workers will be taken on to produce the higher level of output. However there may be a time lag between changes in output and employment. In the short run firms observing changes in demand may alter their output but may delay changing their employment levels until they are certain that the new level of demand will last. In the short run firms can raise their output by asking their existing workers to work overtime.

In the long run whilst output and employment are likely to be directly related they may

not be proportionately related. For example a 6% rise in output may be achieved with