Table Of ContentAGGREGATE DEMAND AND SUPPLY
Also by B. Bhaskara Rao
COINTEGRATION FOR THE APPLIED ECONOMIST (editor)
THE ECONOMETRICS OF DISEQUILIBRIUM MODELS (co-author)
Aggregate Demand
and Supply
A Critique of Orthodox
Macroeconomic Modelling
Edited by
B. Bhaskara Rao
Associate Professor and Director of Postgraduate Studies
School ofE conomics
University ofN ew South Wales
First published in Oreat Britain 1998 by
MACMILLAN PRESS LTD
Houndmills, Basingstoke, Hampshire R021 6XS and London
Companies and representatives throughout the world
A catalogue record for this book is available from the British Library.
ISBN 978-1-349-26295-3 ISBN 978-1-349-26293-9 (eBook)
DOI 10.1007/978-1-349-26293-9
First published in the Uni ted States of America 1998 by
ST. MARTIN'S PRESS, INC ..
Scholarly and Reference Division,
175 Fifth Avenue, New York, N.Y. 10010
ISBN 978-1-349-26295-3
Library of Congress Cataloging-in-Publication Data
Aggregate demand and supply : a critique of orthodox macroeconomic
modelling I edited by B. Bhaskara Rao.
p. cm.
Includes bibliographical references and index.
ISBN 978-1-349-26295-3
1. Demand (Economic theory) 2. Supply and demand. I. Bhaskara
Rao, B., 1939- .
HB842.E85 1998
338.5'21-DC21 97-18334
CIP
Selection, editorial matter and Chapters I and 4 © B. Bhaskara Rao 1998
Chapters 2, 3, 5-11 inclusive © Macmillan Press Ltd 1998
Softcover reprinto fthe hardcover Ist edition 1998 978-0-333-69147-2
All rights reserved. No reproduction, copy or transmission of this publication may be made
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Any person who does any unauthorised act in relation to this publication may be liable to
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The authors have asserted their rights to be identified as the authors of this work in
accordance with the Copyright, Designs and Patents Act 1988.
This book is printed on paper suitable for recycling and made from fully managed and
sustained forest sources.
10987654 3 2 I
07 06 05 04 03 02 01 00 99 98
Contents
Preface xi
Notes on the Contributors xiii
1. Introduction 1
B. Bhaskara Rao
2. Aggregate Demand in Principles
Textbooks
Ken McCormick and Janet M. Rives
2.1 Introduction 11
2.2 Current Textbook Presentations 11
2.3 Other Effects of Price Changes 17
2.4 Additional Considerations 19
2.5 The Need for Alternatives 21
3. Aggregate Demand Curves: A Guide
to Use and Abuse Revisited
Peter H. Hall and Malcolm L. Treadgold
3.1 Introduction 25
3.2 The Conventional Curve 26
3.3 Problems with the Conventional Approach 28
3.3.1 The Volume of Real Aggregate
Demand 28
3.3.2 The Measurement of Excess
Demand/Supply 30
3.3.3 Interdependence of Aggregate
Demand and Supply 31
vi Contents
3.4 Two Alternatives 33
3.4.1 Rowan's Curve 33
3.4.2 Corden's Constant-MV Curve 39
3.5 Conclusion 42
4. What is the Matter with Aggregate
Demand and Supply?
B. Bhaskara Rao
4.1 Introduction 45
4.2 Aggregate Demand, Supply and
the ISLM Model 46
4.3 The Neo Classical Version 56
4.4 The Keynesian Approach 60
4.5 Conclusions 65
5. Walrasian, Non-Walrasian and
Post-Walrasian Perspectives on
the ADAS Model: Theoretical and
Pedagogical Implications
Ralph C. Allen and Jack H. Stone
5.1 Introduction 67
5.2 Institutional Environment 68
5.3 Institutional Environment
Behind ISLM 70
5.4 Inconsistencies in ADAS and
Proposed Alternatives 72
5.5 Post-Walrasian Coordination in ADAS 76
5.6 Conclusion 80
Contents vii
6. The ADAS Model:
Two into One Won't Go
Roy H. Grieve
6.1 Introduction 83
6.2 The Textbook Model 84
6.3 Two Theories, One Model: No Go 88
6.4 The Root of the Problem 90
6.5 Conclusion 93
6.6 Postscript 94
7. Defending ADAS: A Perspective
on the ADAS Controversy
Peter Kennedy
7.1 Introduction 95
7.2 The Rise of ADAS 95
7.3 No Internal Inconsistency 97
7.4 ADAS Can be Confusing 99
7.5 Dynamics 102
7.6 Conclusion 104
Appendix to Chapter 7: Survey Instrument 105
8. Theoretical Inconsistencies in the
ADAS Model: Can the Model
be Rehabilitated?
T. Windsor Fields and William R. Hart
8.1 Introduction 107
8.2 The Textbook ADAS Model 110
8.3 The Aggregate Demand Curve 112
8.4 A Theoretically Consistent ADAS Model 116
8.5 Short Run Aggregate Demand 126
viii Contents
8.6 Price Level and Interest Rate
Determination in ADAS Model 128
8.7 Conclusion 135
9. Acceptable and Unacceptable Dirty
Pedagogy: The Case of ADAS
David Colander and Peter Sephton
9.1 Introduction 137
9.2 What the ADAS Model is Supposed to
Accomplish 138
9.3 Problems with ADAS Analysis 138
9.4 Macro Policy Model 142
9.4.1 The Renaming of the AED Curve 143
9.4.2 Using an Aggregate Supply Path
Rather than a Supply Curve 144
9.5 The Aggregate Supply Path Alternative 151
9.6 The More Limited Applicability of
the Macro Policy Model 152
9.7 Summary 153
10 Aggregate Demand and Supply Analysis:
A Story in the Wrong Language
John W. Nevile
10.1 Introduction 155
10.2 Language of General Equilibrium
Comparative Statics 157
10.3 Marshallian Analysis versus
General Equilibrium 162
10.4 Not only the Wrong Language
but an Unfamiliar Dialect 166
10.5 A Possible Alternative 168
10.6 Conclusion 174
Contents ix
11 A Simple Analysis of Price and Output
Determination: A Model with
Imperfect Competition
Corrado Benassi, Alessandra Chirco and
Caterina Colombo
11.1 Introduction 177
11.2 Aggregate Demand and Supply Under
Imperfect Competition 180
11.3 The Role of Wage Rigidities 182
11.4 A Macromodel of Imperfect Competition 185
11.4.1 Firm's Behaviour 185
11.4.2 Union's Behaviour 187
11.5 Aggregate Behaviour of Firms and Unions 189
11.6 Equilibrium Under Full Nominal Flexibility 191
11.6.1 Determination and Properties of
Equilibrium 191
11.6.2 Aggregate Demand and Aggregate
Supply Under Full Flexibility 195
11.7 Equilibrium Under Nominal Rigidities 195
11.7.1 Equilibrium Under
Nominal Wage Rigidity 297
11.7.2 Aggregate Demand and Supply
Under Nominal Wage Rigidity 198
11.7.3 Equilibrium Under Nominal
Price Rigidity 200
11.8 Concluding Remarks 202
Appendix to Chapter 11 205
Bibliography 209
Index 223
