GEOGRAPHICAL SPACE AND EFFECTIVE DEMAND UNDER STAGNATION

Wataru Johdo

Australian Economic Papers, 2006, vol. 45, issue 4, pages 286-298

Abstract: This paper investigates the adjustment mechanism between geographical space and effective demand under stagnation by constructing a spatial model with stagnation included. The model takes the idea of stagnation in Ono (2001) and combines it with the spatial model of Perera-Tallo (2003). The spatial model features local monopolists that import intermediate goods from other monopolists at a cost that can be decreased through investment. Using the integrated model, we reach the following conclusion: the wider the geographical space, the lower the effective demand under stagnation. This mechanism is explained as follows. Under stagnation, where demand has reached an upper bound, a decrease in the marginal cost of reaching distant intermediate suppliers reduces employment. The reason is 'love of variety' in production: for given final output, more variety of available intermediate inputs crowds out per-variety demand of intermediates and thus employment. Decreases in employment then lead to a decrease in the rate of time preference through a rise in the deflation rate, and thereby decrease the desire for consumption, consequently cutting effective demand. Copyright 2006 The Authors
Journal compilation 2006 Blackwell Publishing Ltd/University of Adelaide and Flinders University .

Downloads: (external link)
http://www.blackwell ... .00294.x/enhancedabs link to full text (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0004-900X

Access Statistics for this article

Australian Economic Papers is edited by Daniel Leonard

More articles in Australian Economic Papers from Blackwell Publishing
Series data maintained by Christopher F. Baum ().