Keynes’ Theory of Employment: Concept of Effective Demand
(Note-Lecture is compiled from internet for teaching purpose)
Great Depression of 1930's created problems of increasing unemployment, reducing national
income, declining prices and failing firms increased in intensity. The classical model
miserably failed to explain and provide a workable solution for how to escape the depression.
Definition of a recession
A recession is characterized as a period of negative economic growth for two consecutive
quarters. In a recession, unemployment will rise, output fall and government borrowing
increase.
Definition of depression
A depression is a recession but much more severe and long lasting. There is no agreed upon
definition of a depression. But, generally a depression would have some of the following
characteristics.
• Decline in output for a prolonged period e.g. greater than 2 years.
• A drop in output of 10% or greater.
• Unemployment rate touching 20% (rather than the 10% rate associated with
recessions)
It was at that time when J. M. Keynes wrote his famous book 'General Theory'. In it he
