Page 235 - DECO402_Macro Economics

Macroeconomic Theory

Notes left side of Y as has been shown in part B of the figure. Kaldor leaves the functions of linear savings
0
and investments because they are incapable of creating cycle. Instead of these he adapts non-linear
savings and investments.

Notes Nicholas Kaldor constructed a model of trade cycle on the basis of Keynesian
terminology of savings and investment.

A non linear investment function I has been shown in figure 26.2.
As economy moves towards expansion phase, which has been
shown by a left side movement along with curve I, where curve I is
almost flat. It means that there is unused capacity at least level of
others and net investment is there. But zero expansion starts then
negative impact of accumulated capital is stronger on investment
decisions in comparison to that on the high levels of production and
profits. Opposed to it at high level of income when economy enters
contraction phase the curve I again become flat and net investment
reduces because increase in costs, increasing costs and increase in
difficulties to take loan will prevent producers from expanding Figure 26.2
much faster. By this rate of increase in production reduces. It
means that present capital stock and capacity is more than current production. This situation further
reduces investment. Hence there is a fall in income and economy enters the phase of contraction by
accumulative impact.

Did You Know? Kaldor shows the expansion of his trade cycle in three phases.

Similarly non linear savings function is shown in figure 26.3. At very
low level of income, saving becomes very less. It may be negative
also. In this way during the phase of expansion MPS is more. At
general levels of income, increase in savings happen at lesser rate. It
has been shown by the medium part of curve S. But at a very high
level of income saving will be much and people will save a large part
of their income.
Cycle can be seen only when none linear saving and investment
curves are brought together as in figure 26.4. Figures A, B and C show
multi-balances on situations. Of these A and B are stable conditions
and C is an unstable condition. I > S between situations C and B below Figure 26.3
condition A, it will raise the level of income higher. S > I between
conditions A and C and above condition B; it will lower the level of income.
But situations A and B are stable only in short term. In long term these conditions become unstable
and path of the cycle is visible. For it Kaldor has used capital stock in form of another variable which
has an impact on the relations of savings and investments. He took both, investments and savings in
form of function of income and capital stock so that

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