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Unit-24: Trade Cycles: Meaning and Types

not generate any cycle by any given motivation Notes
instead till the stable level of income, provides
just a slow increase, which is determined by the
tendency of consumption but if rule of acceleration
is changed then the result is the cycle of ups and
downs start which may be known as Multiplier
level. Accelerator first takes the income above this
level, but as the rate of increase of income reduces,
accelerator changes the least turn which takes the
total income below the multiplier level, and then
up, and like this cycle goes on.

Limitations

Despite of these direct utilities of multiplier- Figure 24.2
accelerator mutual action, presented analysis has its own limitations:-
1. Those various cycles that Samuelson has described, he is silent about their duration.
2. Presented analysis assumes this that tendency of marginal consumption(α) and accelerator (β)
are constant, but in reality they change with the level of income. Hence it may be applicable
only at the level of small ups and downs.
3. Those cycles which have been described in the presented model, they move around stable
level only in a trendless economy. It is not real, because economy is not trendless but stays
in the process of growth. It is the result of it only that Hicks had developed his theory of
trade cycle in progressive economy.

Self Assessment

State whether the following statements are true or false:
7. In prosperity phase, demand, production, employment and income are at high level.
8. In this way, accumulative process of investment, employment, production, income and
increase in prices feeds itself.
9. When from peak, which is of short duration, movement happens downwards, recession
starts.
10. When extensive decline takes place in economic activities, recession merges in boom.

24.6 Hicks’s Theory of Trade Cycle

Prof. J.R. Hicks in his book A Contribution to the Theory of the Trade Cycle, developed his theory of trade
cycles on the based on the rule of Multiplier- accelerator mutual action rule. For him, “Theory of
acceleration and theory of Multiplier are two aspects of the theory of up and down”. Different from
the model of Samuelson, which is applicable for short ups and downs, Hicks’s model is related to the
problem of growth and moving balance.

Ingredients of the model

These are the ingredients of Hicks’s model of trade cycles: Warranted rate of growth, consumption
function, autonomous investment, induced investment function and multiplier- accelerator
relation.

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