Effective Demand

The starting point of Keynes's theory of employment and income is the principle of effective demand. Effective demand denotes money actually spent by the people on products of industry. The money which entrepreneurs receive is paid in the form of rent, wages, interest and profit. Therefore effective demand equals national income.

Theories of Employment and Income An increase in the aggregate effective demand would increase the level of employment. A decline in total effective demand would lead to unemployment. Therefore, total employment of a country can be determined with the help of total demand of a country. According to the Keynes's theory of employment, “Effective demand signifies the money spent on consumption of goods and services and on investment.

The total expenditure is equal to the national income, which is equivalent to the national output”. The relationship between employment and output of an economy depends upon the level of effective demand which is determined by the forces of aggregate supply and aggregate demand.