THE CONCEPT OF MACROECONOMIC COST AND ITS UTILITY

Jean Marczewski

Review of Income and Wealth, 1986, vol. 32, issue 1, 1-24

Abstract: The proposed “Variable Domestic Cost” includes all net payments by sectors belonging to the productive system (enterprises, credit institutions and government) to all other sectors (households, private non‐profit organizations and the rest of the world). Compared with the rate of growth of demand, represented by Gross Domestic Marketable Product at current prices, the rate of growth of VDC per unit produced forms the “profitability function of the nation.” Profitability is positively related to the rate of economic growth and to the price/cost relation. A relative deceleration of unit VDC stimulates economic growth, which enlarges the positive difference between price and cost, and that, in turn, accelerates economic growth. Inversely, a relative acceleration of unit VDC brakes economic growth, while a slowdown in production raises unit costs and depresses prices. The resulting fall in profitability stops economic growth. The main explanatory variables of demand are World trade, monetary and fiscal policy and import prices. The main components of VDC are enterprises' wage costs, social benefits minus social contributions and the government wage bill minus direct taxes payable by households. The fact that in West Germany all these unit costs were increasing more slowly than in France explains why Geman economic growth, much slower than French before 1975, outpaced it after that year, achieving a lower rate of inflation, a larger positive balance of trade and a higher appreciation of the national currency. The concept of VDC is a useful contribution to the theories of inflation and of economic fluctuations and provides a possible explanation of structural unemployment. Maintaining VDC at a lowest possible level should be considered a major object of economic policy.

Date: 1986
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