The Oxford dictionary of Economics has a definition for Demand-Determined Output...
"The situation when effective demand is the only constraint on output. This is likely to be the case only during a deep slump. At most times there are shortages of particular skills or types of equipment which restrict output in some parts of the economy, even when output in other parts is demand-determined. The ability to fill shortages by the use of imports and inward migration of particular types of labour means that an open economy is closer to having its output demand-determined than a closed economy would be."
From my understanding this is a wrong definition. Mainly because I say that effective demand imposes a limit upon the topside of an economic expansion, which is the opposite of a deep slump. In a deep slump, I would say that effective demand increases greatly due to the scarcity of output. In a deep slump, it is not effective demand that constrains output, but rather disruptions in markets and liquidity. Thus my definition is completely opposite to theirs.
The definition above points to a shortage of skills or equipment as the normal constraints on output. When these shortages are overcome by cheap imports or cheap labor, then production can rise more easily to satisfy demand. This assumes a profit motive based on cutting costs. This is a supply-side way to view effective demand.
This definition reflects the process that has eroded effective demand over the years... a process of lowering input costs including real wages. This has led to an eroding of labor share of income, which means effective demand has eroded.
The main impact that effective demand has upon an economy is limiting its upside; Effective demand determines the upper limit of utilizing labor and capital. Such that, as effective demand erodes, it pushes the top limits of utilizing labor and capital down more and more. This is how I explain the current problems in production in the US and elsewhere. Effective demand is imposing its limits at a lower level.
Many economists reason therefore that the economy is still in a deep slump because they say that effective demand or aggregate demand, which limits output only in a deep slump, is limiting production.
My view is that we are not in a deep slump. We are actually near the top of an expansion. This is actually about as good as the economy will get. Effective labor share which represents the top limit of utilizing labor and capital has fallen to 74%. It used to be at 83% regularly. That is a big difference. 74% utilization of labor and capital would have been a deep slump back when effective labor share was 83%. Now it is the best we can do.
So my definition of Demand-determined output is...
"The situation when effective demand constrains output by limiting the combined utilization rates of labor and capital. This occurs at the top of an economic expansion. At most times there are shortages of particular skills and equipment, and disruptions in credit, liquidity and supply chains which restrict output to some extent, while in some parts of the economy output will be unrestricted and demand-determined. The ability to overcome input shortages and various disruptions in production allows an economy to raise output up to the limit determined by effective demand."
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