Page 237 - DECO402_Macro Economics

Macroeconomic Theory

Notes economy by which its savings increase. Hence savings curve shifts upwards. In the same way by the
investment curve I shifting downwards and by savings curve S shifting upwards, point C comes closer
to point B as has been shown in stage 2 of the figure 26.5. This process of curve I shifting downwards
and curve S shifting upwards goes on until both curves do not touch each other and point C and
point B do not meet as has been shown in stage 3 of the figure.26.5. But in this condition S > I in
both directions, that is why in downwards direction it is an unstable condition. It takes the economy
downwards until point A is not reached in stage 3.
Contraction Phase

Contraction phase of trade cycle is also shown in three stages as in figure 26.6. Let us start from situation
Y which matches with the
1
point A in figure 26.4. It is
the point of short term fixed
balance but of a very low
level of income. But at such
low level of income, due
to unused capacity in long
term, capital stock reduces
and investment curve I
shifts upwards. Along with
it savings reduce which
shifts the savings curve Figure 26.6
downwards. Like this by
curve I shifting upwards and curve S shifting downwards conditions A and C come close as has been
shown in stage 5 of the figure. This process will go on slowly unless curves I and S dot not touch each
other and conditions A and C do not meet as has been shown in stage 6 of figure 26.6. But at income
level Y this condition of A + C is unstable in upwards direction because I I>S, it will take in expansive
1
direction until economy does not reach at the high level of income Y at point B. From point B, curve
2
I and S will slowly reach stage 1 shown in figure 26.5 and cyclical process starts again. In this way,
Kaldor’s cyclical process is self-generating.
According to Kaldor, those forces which bring turn point towards bottom they are not definite at the
high level. Boom will definitely end by itself. But depression may fall in static condition and may
stay there until external changes (like discovery of new inventions, opening of new markets etc) do
not come in its protection.
Then in Kaldor’s model, cycles are not necessarily of same length and duration and neither is expansion
and contraction requisitely uniform. In reality, it depends upon slopes of curves I and S and by what
rate do they shift in each stage of the cycle.
Kaldor in describing his theory of trade cycle uses neither acceleration rule nor monetary factors. Also
he shows that how is trade cycle obtained without any growth factor.

Self Assessment

Multiple choice Question:
3. Cycles are possible only when savings and investments are ...............
(a) non linear (b) linear
(c) more (d) less
4. Kaldor leaves the functions of linear savings and investments because they are ........................
of creating cycle.
(a) incapable (b) capable
(c) ahead (d) behind

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