Effective Demand and Economic Growth Models
Principle of Effective Demand
1. Define the offering price and aggregate demand, according to the principle of effective demand.
The aggregate offering price is the expected results affordable to employers, considered as estimated labor costs. The price of aggregate demand is the expected proceeds from employing N men. D = f(N).
2. What determines global production and employment levels?
Production and employment are determined by the intersection of two functions of employment level N and the aggregate supply.
3. What if the amount received exceeds the total bid price?
Employers will increase occupancy levels, raising costs to compete.
4. What determines the income level?
Income level is the surplus of production over factor and usage costs, mainly determined by occupation level.
5. In equilibrium, what determines employment volume?
Employment volume depends on global offering, propensity to consume, and investment volume.
6. What determines the number of workers (N) hired?
The sum of expected community spending, sales, consumption, and new investment.
7. How to increase occupation if propensity to consume doesn’t rise?
Investment should absorb surplus production when consumption is insufficient.
8. Given PMC community, what determines equilibrium employment?
Equilibrium employment depends on investment amount and marginal efficiency of capital.
Post-Keynesians
9. Post-Keynesian thought and similarities?
Post-Keynesian thought emerged in the 1950s, with three streams:
- American: P. Davidson, based on the General Theory.
- Italian: Posinetti, based on Marx and Keynes.
- Other contributions: English-speaking majority and Kalecki.
Highlights:
- Removing impurities from Keynes’s work.
- Completing the general theory of aggregate demand.
- Disagreeing with neoclassical postulates on market equilibrium.
- Emphasizing uncertainty in investment.
- Highlighting the importance of institutions.
- Considering the time factor.
- Acknowledging monopolistic behavior and cost-push inflation.
Harrod Model
10. Harrod model assumptions, variables, and purpose?
Assumptions:
- Aggregate saving is a constant proportion of national income.
- Labor force grows at a constant rate with constant returns.
- Fixed capital-labor combination without technical progress.
Purpose: Dynamic theory of Keynes’ effective demand, determining savings for full employment.
Variables: Labor force growth, per capita production, capital.
11. Explain natural, guaranteed, and effective growth rates.
Natural rate: Maximum rate with given labor and technique.
Guaranteed rate: Income growth with given savings and capital-output ratio.
Effective rate: Actual growth rate, reflecting savings-investment matching.
12. What if actual growth is below guaranteed rate?
Unwanted inventory accumulation leads to reduced future production.
Joan Robinson Model
13. Joan Robinson’s determinants of equilibrium and rule?
Determinants: Technical conditions, saving conditions, investment policies, competitive conditions, wage negotiations, financial condition, capital accumulation, and expectations.
14. Investment policy?
- Capital investment decisions are governed by production companies.
- Benefits must exceed interest cost due to risk.
- Desired capital stock related to expected benefits.
15. Saving conditions?
Depend on business and household incomes.
16. Financing?
Two aspects: Relationship between accumulation desire and borrowing power, and interest rate.
17. Profit and accumulation rates model.
Curve A: Expected return on investment vs. accumulation rate.
Curve I: Accumulation rate vs. profit rate.
Golden Age: Full employment with desired accumulation rate equaling possible rate.
Golden Age Pick: Capital accumulation below full employment.
Age Lead: Rising unemployment and decreasing living standards.
Golden Age Restricted: High growth rate with induced technical progress.
Galloping Platinum Age: High employment but limited growth due to plant shortage.
Platinum Age Crawling: Plant exceeds possible growth rate.
Golden Age Bastard: Inflationary pressure with real wage resistance.
Platinum Age Bastard: Technical progress reduces labor needed for minimum wage.