Macroeconomics

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Measures to Increase MPC

mpc_0Measures to Increase Marginal Propensity to Consume | Macroeconomics

Marginal Propensity to Consume (MPC) is the extra amount that people consume when they receive an extra amount of disposable income (Income after paying tax) .The short run production function is stable as it is very difficult to change in the short period of psychological and institutional factors affecting the propensity to consume of the people. However in long ,raising propensity to consume is possible by the following measures:

1)Income Redistribution:

Income Redistribution helps to increase MPC. Government should redistribute national income in favor of the poor people by imposing progressive taxes on the rich and providing subsidies to the poor people. When income redistribution takes place poor people also become able to consume goods and services.

2)Wage Policy:

Wage Policy helps to increase MPC. In long run transfer of income from non wage group through progressive taxation, subsidies is affected  with the help of new wage policy. This type of wage policy will increase the consumption expenditure of wage earners.

3)Social Security:

Social Security  helps to increase MPC. Some of the social security measures like unemployment compensation , old age pension ,health ,insurance etc. helps to raise and stabilize consumption function. According to Kurihara ,a social security program is regarded as a solution to the “paradox of thrift(people try to save money during an economic recession ,which leads to fall in economic growth)” common to all wealthy capitalist economies.

4)Credit Facilities:

Producers should provide easy and cheap credit facilities for the purchase of consumer durables like motorbike,T.V,refrigerators ,etc  which will lead to increase the marginal propensity to consume of the people.

5)Urbanization and Colonization:

Urbanization and Colonization also helps in increasing MPC. The propensity to consume of the people living in cities and newly developed colonies is higher than that of the village people.

6)Advertisement and publicity:

Advertisement and publicity helps in increasing MPC. The proper program of publicity through advertisement helps in bringing notice to the consumers about the product and services.

7)Interpersonal Comparison:

Interpersonal Comparison helps to increase MPC. Interpersonal Comparison of the living standards of the people living in different regions of the same country as those of living in different countries create new requirements and thus increase expenditure in the new consumption item.

 

Copyright : Nagendra Ray

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Determinants of Consumption Function

consumptionDeterminants of Consumption Function | Macroeconomics

The factors that affect the demand for  consumption are called determinants of consumption function.J.M Keynes has divided factors influencing the consumption function into two parts: Subjective factors (They are the internal factors influencing the consumption function) and Objective factors ( They are the external factors influencing the consumption function).

A) Subjective Factors:

Subjective factors are the internal factors or we can say factors related to psychological feelings influencing the consumption function.Major subjective factors influencing consumption function are:

1)Security Motive:

Securitive motive plays an important role in determining the consumption function. As we know there are many provision of social security program like old age allowances,unemployment allowances ,disable allowances which helps to increase the consumption expenditure or simply consumption function.If there is insecurity ,people may hold certain amount of money  which reduces consumption expenditure.

2) Demonstration Effects:

Demonstration Effects plays an important role in determining the consumption function. Many people are influenced by the consumption of other people and try to adopt similar consumption practice which is called demonstration effect. This effect increases the consumption expenditure.

3)Increasing Social Status:

Social Status  plays an important role in determining the consumption function. People   are more motivated to save more and accumulate large wealth with a believe that it will increase their social status. This helps to increase saving and decrease the consumption of the people.

4)Financial Prudence:

Business firm desire to save more to increase undistributed corporate profit for the expansion and modernization of business. If the business firm keeps realtively larger amount of its profit for financial prudence development and pay smaller amount of profit as dividends to the shareholder , which will automatically reduce the propensity to consume of the society.

 

B) Objective Factors:

Objective factors are the external factors or we can say factors which are real and are measurable influencing the consumption function. These factors can be easily changed in the long run.Major subjective factors influencing consumption function are:

1)Income of the people:

Income plays an important role in determining the consumption function.Income of the people is the most influencing factor for consumption and there is positive relationship between income and consumption. When income increases, consumption also increases and vice-versa.

2)Income Distribution:

Income Distribution plays an important role in determining the consumption function.If there is large disparity between rich and poor ,the consumption is low because the rich people have low propensity to consume than the poor people .Similarly ,a community with a very equal distribution of income tends to have high propensity to consume and low propensity to save.

3)Price level:

Price level plays an important role in determining the consumption function.When the price falls, people will consume more  and propensity to consume of the society increases.

4)Wages level:

Wages level plays an important role in determining the consumption function.When wages increases ,people will consume more and vice-versa.

 5)Interest rate:

Rate of interest plays an important role in determining the consumption function.Higher the rate of interest  will lead people to save money more and reduces consumption.

6)Fiscal Policy:

Fiscal policy plays an important role in determining the consumption functionWhen government reduces the tax,the propensity to consume of community increases. The progressive tax system increases the propensity to consume of the people by altering the income distribution.

 

Copyright: Nagendra Ray

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Basic Issues In Macroeconomics|Macroeconomics

Basic Problems Studied in Macroeconomics - Income InequalityBasic Issues In Macroeconomics | Macroeconomics

Macroeconomics is the branch of economics that deals with the study of aggregate economic variables like aggregate demand, aggregate supply, price level, etc.

Basic Issues in macroeconomics are the economic problems that have often been confronted by different countries at different points of time. It helps to provide sound theoretical framework for investigating causes and effects of economic problem and provides the effective guidelines for finding appropriate policy that measures to solve the economic problem.

1) Unemployment:

Unemployment is the condition in which resources are willing and able to produce goods and services but are not engaged in productive activities. Analysis of unemployment especially labor employment goes hand in hand with the study of macroeconomics that emerged from the Great Depression 1930s.

Types of Unemployment

  • Cyclical Unemployment: This type of unemployment occurs high during recessions and depressions, and low during period of economic growth.
  • Frictional Unemployment: This type of unemployment occurs when workers take some time to move from one job to another job.
  • Seasonal Unemployment: This type of unemployment occurs because the demand for some workers varies widely over the course of the year.
  • Structural Unemployment: This type of unemployment occurs because some labor markets have more workers than the job available. Wages do not decrease to bring the market in equilibrium.

2) Inflation:

Inflation is the persistent increase in average price level in the economy. It is measured by inflation rate ,annual % rate in price index. As inflation rises every dollar you own buys a smaller percentage of a good or service.

3) Business Cycle:

Business Cycle is the fluctuation in economic activity that an economy experiences over a period of time. Business cycle is mainly defined in terms of expansion and recession. During expansion period economy is growing and during recession economy is decreasing.

4) Economic Growth:

Economic growth is attended by increasing the quality or  quantity of the economic resources such as land ,labour,capital and entrepreneurship. The five economic goals are Population growth ,investment, exploration, technological innovation and education. Other economic goals are employment, stability, efficiency and equity.

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