The General Theory in an Open Economy

  • Louise Davidson


Keynes’s (1936) General Theory of Employment Interest and Money1 is developed primarily in a closed economy context. Keynes did, however, introduce an open economy analysis when he noted that:
  1. (a)

    trade could modify the magnitude of the domestic employment multiplier (p. 120);

  2. (b)

    reductions in money wages would worsen the terms of trade and therefore reduce real income, while it could improve the balance of trade (p. 263); and

  3. (c)

    stimulating either domestic investment or foreign investment can increase domestic employment growth (p. 335)



Exchange Rate Real Wage Trading Partner Full Employment Exchange Rate Regime 
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  1. 1.
    John Maynard Keynes (1936), The General Theory of Employment, Interest and Money (New York: Harcourt).Google Scholar
  2. 7.
    M. Friedman (1974), ‘A Response to His Critics’ in Milton Friedman’s Monetary Framework: A Debate With his Critics, by R. J. Gordon (ed.) (Chicago: University of Chicago Press), p. 151.Google Scholar
  3. 9.
    The Collected Writings of John Maynard Keynes, Vol XXV, by D. M. Moggridge (ed.) (London: Macmillan, 1980), p. 25.Google Scholar
  4. 13.
    See P. Davidson and E. Smolensky (1964), Aggregate Supply and Demand Analysis (New York: Harper & Row), pp. 128–39.Google Scholar
  5. 14.
    See J. Brothwell (1984), ‘Wages and Employment’, Journal of Post Keynesian Economics, 6Google Scholar
  6. and P. Davidson (1984), ‘The Marginal Product is Not the Demand Curve for Labor’, Journal of Post Keynesian Economics, 6.Google Scholar

Copyright information

© Paul Davidson 1999

Authors and Affiliations

  • Louise Davidson

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