The principle of effective demand states that given endogenous expenditure
patterns, the level of exogenous expenditure determines the level of
employment. If investment represents the sole form of exogenous expenditure,
employment adjusts to the level of investment. If exogenous expenditure
changes, equilibrium is restored via the equilibrating variable, employment. If
employment is linked in a unique way to income, we have what is referred to
as the income adjustment process.
The income adjustment process is investigated in a closed and a small open
economy (SOE) which imports consumption and capital goods. If a SOE
imports its capital goods, the causal link between investment and employment
is weakened. When capital goods are imported, investment adjusts to the
balance of payments and animal spirits are constrained. Certain South African
data are analysed within the framework of the income adjustment process.M.A.(Economics
