- Demand-led growth
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Demand-led growth is a theory in Macroeconomic growth theory which is based on the Keynesian principle of effective demand. Under demand-led growth, the capacity of the economy to supply output expands in response to an increase in the level of effective demand, which is the inverse of classical growth theory ,which relies on Say's Law that stats that supply crates its own demand. The theory shows how increase in the aggregate consumption expenditure increases aggregate income of the economy. The increase in consumption will increase the income more than proportionately through the multiplier effect.the main driver of growth of the economy according to this theory is aggregate demand. The theory says that the potential output by itself is demand driven and not the other way round. because the growth is more demand driven in this model the focus is more on effective demand. The absolute income hypothesis given by Keynes shows the relation between income and consumption and how consumption increases due to the increase in income. This increased consumption will increase the income by the multiplier effect. the basic idea is that the effective demand may determined the potential output through its effects on capital stock and factors of production.
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