Effective-demand-constrained growth in a two-sector Kaldorian model

Abstract

The paper presents a formalization of Kaldor's two-sector agriculture-industry model of economic growth. It analyzes the model under two different scenarios. The first scenario—namely, that of idealized (relative) price adjustment in which growth is unconstrained by effective demand—is already well known in the literature. For Kaldor, however, this scenario represented a purely hypothetical theoretical benchmark. This is because it assumes that price adjustment is guided by notional quantities. In contrast, the second scenario, that of quantity adjustment under conditions of false trading at prices that fail to reconcile notional levels of demand and supply, was considered to be more realistic by Kaldor. This is because, in this scenario, the growth of industry is constrained by a lack of growth of effective demand from agriculture. The formalization in this paper both clarifies and removes what are seen as inconsistencies in Kaldor's model.

Keywords:

• effective demand
• growth
• Kaldor
• terms of trade