Page 227 - DECO402_Macro Economics

Macroeconomic Theory

Notes Warranted rate of growth is that rate , which maintains itself. It is according to saving-investment
balance. When actual investment and actual saving are taking place at the same equal rate then it is
said that the economy is growing at a warranted rate. According to Hicks, it is Multiplier- accelerator
mutual action only that leads the way to up and down around warranted rate.
Consumption function takes the form of C = α Y . Consumption in period t is considered to a function
t
t–1
income (Y) of previous period (t – 1). Like this, consumption lags behind income and multiplier is
understood as lagged relation.
Autonomous investment , is free of changes in level of production, hence it is not associated with
the growth of the economy.
At the other end, induced investment is dependent on the changes in levels of production, hence is
a function of economy’s growth rate. In Hicks’s model, accelerator is based on induced investment,
which along with Multiplier f = brings upturn. Hicks has defined accelerator like this that it is the
ratio of induced investment with increase in income.
On Multiplier and accelerator being given in stable values, leverage effect only is responsible for ups
and downs.

Assumptions of the Model

Hicks’s theory of trade cycle is dependent on the below given assumptions:
y Hicks assumes that economy is progressive in which autonomous investment increases at a
constant rate in such a way so that economy stays in moving balance.
y Savings and investment Co-efficient change in such a way overtime that upwards displacement
from balance path brings lagged movement far from the balance.
y Hicks assumes that value of Multiplier and accelerators are fixed.
y Economy cannot expand beyond the level of full employment.

24.7 Summary

y First let us take that situation , when depression had existed for a few days and recovery or
lower turn point starts. Originating forces or starters are exogenous or endogenous forces.
Assume that semi durable things have worn off and consequently it becomes important that
they are substituted in the economy. By this demand increases and for fulfilling the increased
demand investments and employments increase. Recovery of industry starts. Recovery of
related capital goods industry also starts.

24.8 Keywords

y Recovery- Regain.
y Boom- Fast Speed.

24.9 Review Questions

1. How many types of trade cycles are there?
2. Tell the phases of trade cycles.
3. Write the money theory of Hawtrey’s Trade cycle.
4. What is Hicks’s trade cycle?

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