Below Full Employment Equilibrium – Definition

Cite this article as:"Below Full Employment Equilibrium – Definition," in The Business Professor, updated February 24, 2020, last accessed June 1, 2020, https://thebusinessprofessor.com/lesson/below-full-employment-equilibrium-definition/.

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Below Full Employment Equilibrium Definition

The Below full employment equilibrium is a term in economic analysis that shows that the output of the short-run gross domestic product (GDP) of an economy is lower than the expected long-term GDP of the same economy. This means that the current GDP  is lower than the potential real GDP.

The gap between these two GDPs is an indicator of a recessionary period in the economy. The below full-employment equilibrium is used in macroeconomics to depict a situation in an economy where economic inputs are giving less than the expected level of employment that could have been achieved.

A Little More on What is Below Full Employment Equilibrium

Below full employment equilibrium is realized when an economy is below its long-term potential real GDP level, the gap between the current GDP and potential GDP would also lead o a gap in the employment level in the economy. When there is a gap in the employment level, it means the economy is tilted towards a recession.

A full employment equilibrium means an economy is adequately using all its input resources such as labor, capital, land, real estate, and others. While a below employment equilibrium means input resources are not utilized to the fullest potential in an economy.

Reference for “Below Full Employment Equilibrium”

https://www.investopedia.com/terms/b/belowfullemploymentequilibrium.asp

www.businessdictionary.com/definition/below-full-employment-equilibrium.html

www.economicsdiscussion.net/…full-employment…under-employment-equilibrium…/…

https://www.khanacademy.org › … › Equilibrium in the AD-AS Model

https://study.com/academy/lesson/full-employment-gdp-definition-and-examples.html

Academics research on “Below Full Employment Equilibrium”

Keynes’s approach to full employment: aggregate or targeted demand?, Tcherneva, P. R. (2008). Keynes’s approach to full employment: aggregate or targeted demand?. This paper argues that John Maynard Keynes had a targeted (as contrasted with aggregate) demand approach to full employment. Modern policies, which aim to close the demand gap, are inconsistent with the Keynesian approach on both theoretical and methodological grounds. Aggregate demand tends to increase inflation and erode income distribution near full employment, which is why true full employment is not possible via traditional pro-growth, pro-investment aggregate demand stimuli. This was well understood by Keynes, who preferred targeted job creation during expansions. But even in recessions, he did not campaign for wide-ranging aggregate demand stimuli; this is because different policies have different employment creation effects, which for Keynes was the primary measure of their effectiveness. There is considerable evidence to argue that Keynes had an on the spot approach to full employment, where the problem of unemployment is solved via direct job creation, irrespective of the phase of the business cycle.

Disguised Unemployment and Agricultural Development, Mehmet, O. (1971). Disguised Unemployment and Agricultural Development. Canadian Journal of Agricultural Economics/Revue canadienne d’agroeconomie19(1), 12-21. This paper presents a theoretical analysis of disguised unemployment in less developed countries, which tends to lend support for agricultural development policies as the most effective means of eliminating such unemployment. In addition, it is shown that urban unemployment may also be remedied through such policies. The overall conclusion of the theoretical analysis is that agricultural policies in the less developed countries manifesting disguised and urban unemployment should, as a first target, aim at maintaining farming activities throughout the calendar year at levels achieved during peak seasons.

Echoes of Veblen’s theory of business enterprise in the later development of macroeconomics: Fisher’s debt-deflation theory of great depressions and the financial …, Dimand, R. W. (2004). Echoes of Veblen’s theory of business enterprise in the later development of macroeconomics: Fisher’s debt-deflation theory of great depressions and the financial instability theories of minsky and tobin. International Review of Sociology14(3), 461-470. Irving Fisher’s debt-deflation theory of great depressions, first published in 1932 and 1933, was invoked by Hyman Minsky and James Tobin as a crucial precursor of their theories of macroeconomic financial instability. This paper argues that Wesley Mitchell was right to perceive a close intellectual affinity between Fisher’s debt-deflation theory and Thorstein Veblen’s Theory of Business Enterprise (1904), and that this affinity also exists between Veblen (1904) and the analyses of Minsky and Tobin.

An empirical analysis of remittance flows into West African Economic and Monetary Union: a panel time-series approach, Donou-Adonsou, F., & Lim, S. (2016). An empirical analysis of remittance flows into West African Economic and Monetary Union: a panel time-series approach. Applied Economics48(11), 1018-1029.

External debt, government expenditure, investment and growth, Gupta, G. S. (2001). External debt, government expenditure, investment and growth. In Contemporary Issues in Development Economics (pp. 125-138). Routledge. The full employment theory of the classical school has been proved wrong by the real life experiences of the world since the Great Depression. Though the Keynesian theory of the possibility of both full as well as below full employment equilibrium has the limitations of ignoring the role of expectations and policy lags, among others, its prescription of enlarging the effective (aggregate) demand to remove unemployment is still valid. For a developing economy, a relatively easy way to expand aggregate demand would be through an increase in government expenditure financed through raising external debt. Thus, external debt, to the extent it is sustainable, could be a way to alleviate the problem of unemployment and to push up growth.

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