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Hitesh Jhanji, Lovely Professional University Unit-26: Kaldor’s Theory of Trade Cycle Contents

Unit-26: Kaldor’s Theory of Trade Cycle Contents Notes

Contents
Objectives
Introduction
26.1 Kaldor’s Theory of Trade Cycle
26.2 Stabilisation Policies or Measures to Control Trade Cycles
26.3 Summary
26.4 KeyWords
26.5 Review Questions
26.6 Further Readings

Objectives
After studying this unit, students will be able to:
y Know the Kaldor’s Theory of Trade Cycle,
y Know the Stabilisation Policies.

Introduction

In form of a measure to control business ups and downs monetary policy is run by the central bank
of a country. Central bank adopts many measures to control the quantity and quality of credit. For
increasing the reserve of commercial banks it reduces rank rates and interest rates of the banks. It
purchases securities from the open market. It reduces limit requirements on loans and motivates the
banks to provide more loans to consumers, businessmen, traders etc.

26.1 Kaldor’s Theory of Trade Cycle

Nicholas Kaldor constructed a model of trade cycle on the basis of Keynesian terminology of savings
and investment. According to him it is the effect of cycle pressures that which takes the planned
saving and investment of the economy towards equality. Actually, difference in planned saving and
investment brings cycle. But cycle is possible only when saving and investments are non-linear.
Consider figure 26.1(A) and (B) where I and S are equal at the income level Y of equilibrium. But each
0
situation is a situation of single balance.
In the part A of the figure beyond Y
0
where I > S is a situation of unstable
imbalance because such situation
will bring unlimited expansion, full
employment and hyper-inflation. At
the other side if S > I then such situation
brings collapse along because of the
downward movement towards the Figure 26.1

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