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Aggregate demand is influenced by the functional distribution of income of an
economy and that of its trading partner. The relationship between income distribution
and output is analysed in a short-run, two-country neo-Kaleckian model. The
effects of devaluation and redistribution are discussed in detail. Trade and redistribution
within one country interact and output increases or decreases with changes
in either depending on the specific distributional and exchange rate movements.
The Marshall–Lerner condition is shown to be equivalent to the assumption of
expansionary devaluation. If devaluation increases output, national redistribution
policy towards wage earners is also more likely to be expansionary.
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