Profits and GDP in the basic model

Abstract

In the basic model it is assumed that the economy is closed and there is no government. In this situation, with two sectors producing respectively investment and consumption goods, total output and employment are determined by investment through the Keynesian investment multiplier. This result obtains because the capitalist economy is demand-constrained. By contrast, the centrally planned socialist economies were supply-constrained. In the capitalist economy the multiplier process ensures that investment finances itself through providing exactly the same amount of saving as investment in any given period. However, the condition for the stability of this result is the rise in wages with labor productivity.