Learn Economics by Dr. Swati Gupta

The Concept of Multiplier The concept of multiplier was first developed by F. A. Kahn in his article "The Relation of Home Investment to Unemployment" in the Economic Journal of June 1931. Kahn's multiplier was the Employment Multiplier.   Keynes took the idea from Kahn and further refined it and formulated the investment or income multiplier. Investment multiplier refers to the number of times by which the increase in output or income exceeds the increase in investment. According to Keynes, “The multiplier establishes a precise relationship, given the propensity to consume, between aggregate employment and income and the rate of investment. It tells us that, when there is an increment of investment, income will increase by an amount which is k times the increment of investment" i.e., ∆Y=k∆I where Y is income, I is investment, ∆ is change and k is the multiplier. For example, if investment is made of Rs 100 crore, then the income will not rise by 100 crores o...

Investment Function Generally, investment means to buy shares, stocks, bonds and securities which are already existing in stock market. But it is not considered as real investment because it is simply a transfer of existing assets and this is called financial investment. Investment is the new addition to the stock of physical capital such as plant, machines, trucks, new factories and so on that creates income and employment. According to Keynes, investment refers to real investment which adds to capital equipment. Investment includes new plant and equipment, construction of public works like dams, roads, buildings, etc. The addition to the stock of physical capital raises the level of aggregate demand which brings about addition to the level of income and employment in the economy. Thus, investment means the sum of spending made by the business firms per unit of time to build physical ‘stock of capital’ Capital and Investment : The terms ‘capital’ and ‘investment’ are two different co...

Water- Diamond Paradox  Water-Diamond Paradox is one of the most famous puzzles in economic theory that is why diamonds are more expensive than water. Water is essential for life as without its consumption one cannot live or survive while diamonds, though attractive and beautiful, satisfy less important human needs than water. Then, how it can be that less useful commodity like diamonds is so expensive and a highly useful commodity as water is very cheap in the market. According to Adam Smith, value has two different meanings. The one may be called “value in use”; the other, “value in exchange.” The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but...