ADDING SUPPLY-DRIVEN CONSUMPTION MAKES THE GHOSH MODEL EVEN MORE IMPLAUSIBLE

Guerra and Sancho (2011) argue that adding a supply-driven consumption function to the Ghosh model diminishes its implausibility in the case of centrally planned economies. Extending the Leontief model with a demand-driven consumption function does make that model more realistic. Extending the Ghosh model, however, makes it even more implausible in the case of a market economy, while it becomes even more problematic as a guide for a centrally planned economy. The prime reason is that complementarities between inputs are negated, not only for firms, but now also for households. Consequently, industry and aggregate output may now increase, while corresponding value added decreases, and vice versa.