National Income and Flow-of-Funds Analysis

By John P. Powelson | Go to book overview

Chapter 19
INCOME DISTRIBUTION DURING INFLATION

Not only does inflation affect the flow of gross national product into different channels, as described in Chapters 16 and 17, but it also causes a different distribution of gross national income from that of more normal times. In a severe inflation, the winners are those who make real capital gains by trading investment property. In a less severe inflation, property holders compete with factors of production that can revise their incomes upward to keep pace with (or exceed) the inflation. In any inflation, the losers are those whose incomes are fixed in money terms.

Because a rigid production frontier is assumed, the inflationary events described in this chapter are more readily recognized in less-developed countries, where productivity increases slowly, than they are in industrial nations. Despite this fact, there are many common characteristics of inflation wherever it strikes, and the lessons of more severe inflations provide insight into the milder ones. The lid on productivity, imposed in this chapter for pedagogical reasons, will be uncapped in the next.


FIRST MODEL: UNCHANGING VERSUS CHANGING MONEY INCOMES OF FACTORS

If no action is taken to adjust the contractual earnings of any factor of production during an inflation, then those who reap the profits will benefit from the proceeds of increased prices. Suppose that in period zero (equilibrium), which we shall designate as the base period, gross national product is $100h, of which $75d is consumption and $25g investment. Wages are $80a and the residual ($20b) is paid in dividends. The average propensity to consume of both wage earners and dividend earners is 75%; we shall assume that marginal propensity is the same as the average. The entry for period zero is shown at the top of page 408.

Beginning in period 1, and once during every period thereafter, business borrows $25 from the banks to finance additional (exogenous) capital investment, bringing the money level of investment up from $25g to $50p. However, we shall assume that real GNP cannot be increased; that is, production is already on the frontier, and the frontier cannot be extended.

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