UNCTAD On Economic Dynamics

From United Nations’ Conference on Trade and Development (UNCTAD)’s 2015 report, page 44:

… exposure to unregulated and large financial flows alters macroeconomic developments in ways that can lead to a slowdown of GDP growth as well as unstable internal dynamics marked by sudden shifts of income and wealth between the main sectors (private, public and external). A convenient way to map these shifts and their relationship with economic growth is by using the “demand stances” framework (see Godley and Cripps, 1983; Godley and McCarthy, 1998; and Taylor, 2001 and 2006). This framework reasserts the Keynesian principle that sustained growth requires continuously increasing injections (which, in simple macroeconomic terms, include private investment, government expenditure and exports) into the flow of income. These injections, in turn, require a steady growth of leakages (measured by the propensity to save, the tax rate and the import propensity), which over time ensure financial stability, as credit rises along the circular flow of income. Thus GDP growth can be explained as the growth, along stable norms, of injections relative to leakages; these eventually determine financial transfers between the main sectors. Such ratios of injections to leakages are termed stances and provide a measure both of demand drivers and financial balances.


In mathematical terms, the main accounting identity defines GDP as the sum of consumption (C), private investment (I), government expenditure (G) and exports(X) minus imports(M). Simple assumptions allow specifying the tax rate (t) and the savings and import propensities, s and m respectively, as: T = t · GDP; S = s · GDP; M = m · GDP, where T stands for total tax revenue and S for private savings. Arrangements of these equations around the accounting identity yield the expression: GDP = (G + I + X)/(t + s + m), or alternatively: GDP = wt · (G/t) + ws · (I/s) + wm · (X/m) where wt , ws and wm are the weights of each of  the leakages (tax, savings and import propensities, respectively). This equation establishes that growth of GDP depends on the growth of the three variables, G/t, I/s and X/m; defined as fiscal stance, private stance and external sector stance, respectively, amplified by the strength of the respective multipliers, given the mentioned weights, in the macroeconomic context. To avoid complicating the presentation with derivation of the steady state conditions, it is sufficient to note that these stances reflect financial conditions as well, where a larger numerator than the denominator points towards a net borrowing position. Thus, a steady path of sustained growth and financial stability requires that none of these stances grow at a proportionally faster pace than the others for a prolonged period of time.


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