Definition & Reality in the General Theory of Political Economy

by Thomas Cool

C + S + (RTAX - TRF)

C = consumption G = government consumption I = investment (incl. unintended stocks) NX = exports minus imports YR = real gross domestic product

YD = YR - RTAX + TRF = C + S = disposable income TRF = government transfer payments [69] RTAX = real tax revenue DEF = G + TRF - RTAX = S - I - NX = government deficit S = saving [70]

We take G, TRF and NX as exogenous and known. We are now only interested in expectational equilibrium. Aggregate demand is YR* = C* + G + I* + NX. With the rate of interest i and the marginal tax rate r, behavioural relations are:

C* = TRF + c (YD* - TRF) + C₀

I* = I₀ - b i*

RTAX* = r YR*

In equilibrium C = C* gives YR* = YR - since C = C* iff YD = YD* iff I* = S* = I = S. This can be represented by the IS curve:

YR = TRF + c (YD* - TRF) + C₀ + G + I₀ - b i + NX