To understand properly growth rate differences between countries it is essential to understand why the growth of factor supplies differs between countries and. in Post-Keynesian view, this can only be understood with reference to the overall strength ...
To understand properly growth rate differences between countries it is essential to understand why the growth of factor supplies differs between countries and. in Post-Keynesian view, this can only be understood with reference to the overall strength of demand. In an open economy, according to Post-Keynesian, demand for exports relative to imports is the crucial component of autonomous demand because the balance of payments position determined by export and import sets the limit to the growth of effective demand and, thereby, the overall growth of the economy.
Therefore, they present a demand-orientated model of economic growth which is called the balance-of-payments constrained growth model as an alternative to the supply-orientated approach of neoclassical theory. Their conclusion is that a country's long run growth rate depends on its income elasticities of demand for exports and imports.
The basis of this argument is that, in the post-war period changes in relative price have played a quantitatively small role in determining the growth of a country's trade, especially when compared with the impact of the differences in non-price aspects of competition. Consequently it is argued that it is primarily output that alters to keep import and export in equilibrium rather than relative prices in international trade.
The balance-of-payments constrained model is an efficient framework of analyzing economic growth in relation to a country's international payments position. Its roots are located in mercantilism of the 16th and 17th century and Harrod's foreign trade multiplier of 1933.
The policy implication of this model is quite clear. In an open economy, relevant economic management is the one that manipulates the income elasticities of demand for exports and imports which reflect the non-price aspects of competition.