Demand and distribution in integrated economies

Abstract

Aggregate demand is influenced by the functional distribution of income of an economy and that of its trading partner. The relationship between income distribution and output is analysed in a short-run, two-country neo-Kaleckian model. The effects of devaluation and redistribution are discussed in detail. Trade and redistribution within one country interact and output increases or decreases with changes in either depending on the specific distributional and exchange rate movements. The Marshall–Lerner condition is shown to be equivalent to the assumption of expansionary devaluation. If devaluation increases output, national redistribution policy towards wage earners is also more likely to be expansionary.

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