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Effective Demand and Growth: An Analysis of the Alternative Closures of Keynesian Models

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Abstract

This paper presents a one-sector model where investment and autonomous expenditures determine the growth rate of income. The analysis starts with the dynamics of demand-led growth and the interaction between investment and autonomous expenditures. Since by definition investment determines the growth rate of capital, the paper uses the relation between demand-led growth, multifactor productivity growth, and labor-force growth to analyze the alternative closures of the supply side. After discussing how partially endogenous labor force and multifactor productivity may relax supply constraints, the paper shows how changes in the average propensity to save may accommodate investment and autonomous expenditures when the economy reaches its maximum growth rate. Since nothing prevents the functional distribution of income from changing before that happens, the paper concludes with a two-species model (for the labor share of income and the income-capital ratio) to illustrate how demand-led growth can generate business fluctuations while remaining below supply constraints.

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Bibliographic Info

Paper provided by Schwartz Center for Economic Policy Analysis (SCEPA), The New School in its series SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. with number 2001-05.

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Length: 26 pages
Date of creation: Dec 2001
Date of revision:
Handle: RePEc:epa:cepawp:2001-05

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Keywords: growth; effective demand; Keynesian; demand-led;

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Cited by:
  1. Florencia Médici, 2011. "A Cointegration Analysis on the Principle of Effective Demand in Argentina (1980-2007)," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(61-62), pages 103-137, January -.

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