Full Employment

Full employment refers to a situation when all those who are able to work and are willing to work (at the existing wage rate) are getting work. It is a situation when, corresponding to a given wage rate, demand for labor force is equal to supply of labor force, and the labor market is cleared (it is in a state of equilibrium).

Two situations must be noted in this definition:

1) Full employment does not mean that everyone is employed. People who are voluntarily unemployed, such as ‘idle rich’, are not employed because they are not willing to work. They are not treated as unemployed.

2) There might be some amount of frictional unemployment owing to technological improvements, decrease in demand for the product of some industries, or because some person may be changing jobs or because of structural changes in the economy. It may take some time for these persons to get a new job. So, these people may remain temporarily unemployed.

Investment Multiplier At a Glance

The working of the Multiplier assumes the following process:

multipler-process

Change in investment causes change in income. As a result, consumption changes. Consumption expenditure of one person is an income of the other.

Hence, change in consumption leads to change in income. This process continues till ∆C falls to zero.

MPC is the core factor in the process of income generation. Higher the MPC, greater is the conversion of income into consumption expenditure. Accordingly, greater is the generation of income. As, it is expenditure that is converted into income.

Expenditure is the injection into the income generation process, saving is the leakage.

For Detailed Study -

1. Investment Multiplier

2. Graphic Presentation of Multiplier

How Multiplier Mechanism Works

Let us understand the logic behind the direct relationship between MPC and multiplier through Multiplier Mechanism. It runs like this:

1) Suppose AB industry limited spends Rs. 100 crore in setting up a new plant i.e  ∆I = Rs. 100 crore.

This will lead to creating more demand for goods and services required for the setting up of this new plant. There will more demand for machinery, raw materials, labour etc.

This will generate income for all those people who are associated with the setting up this plant and leading to more output and income.

As a result national income in the first will increase by an amount equal to amount of investment i.e  ∆Y = Rs. 100 crore

2) This ∆Y = Rs. 100 crore would be split into ∆C and ∆S as a part of income is spent and a part of it is saved.

3) In round – 2, ∆C would be converted  into ∆Y as people who receive this new income (Rs. 100 crore) directly from the building of the factory will spend some of it on consumer goods like food, clothing, TV, cars, etc.

Here comes an important point:

The exact amount of additional consumption expenditure depend on the MPC(c).

Suppose MPC is 0.8, then 

MPC = ∆C / ∆Y (as discussed in consumption function)

∆C = MPC (∆Y)

∆C = 0.5(100)

     = Rs. 50 crore

If  MPC is 0.4, then

∆C = 0.4(100)

     = Rs. 40 crore

Relationship between Investment multiplier and Marginal propensity to consume

There is a direct relationship between multiplier and MPC. Higher the value of MPC, higher the multiplier affect and lower is the value of multiplier, lower the multiplier effect. 

We have already derived the multiplier formula i.e 

K = 1 / 1-MPC

Now we see the multiplier effect by taking different values of MPC

If MPC = 0.5 

K = 1 / 1-MPC

K = 1 / 1-0.5

    = 1 / 0.5

    = 2