Economic growth and the growth of effective demand

Abstract

With an adequately skilled workforce and a sufficient supply of raw materials and energy, it is investment that allows national income and employment to grow. However, this growth is only potential. If it is to materialize, then effective demand has to expand in step with production capacity. To analyze this growth it is necessary to distinguish between actual investment that creates productive capacity this year, and investment decisions that will result in productive capacity in the future. As investment takes place, additional demand raises output and employment. However, as productive capacity expands, it brings forward the moment when demand starts to lag behind the growth of capacity, and excess capacity starts to depress investment. This causes business cycles. In the long run technological change will affect the trend of growth through successive business cycles.