Business and Trade cycles
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This document discusses business and trade cycles. It provides three main theories for the causes of trade cycles: 1. Schumpeter's innovation theory which argues that business cycles are caused by periodic bursts of innovation by capitalists. This leads to periods of boom and recession as innovations are adopted. 2. Samuelson's multiplier-accelerator theory which explains how interactions between consumption, investment, and income can cause fluctuations in economic activity through feedback loops. 3. Hicks' theory which views trade cycles as temporary deviations around an economy's steady growth path. It analyzes how increases in autonomous investment can trigger boom-bust cycles through multiplier and accelerator effects. All three theories attempt to explain the regular patterns of
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Theories of trade cycle
The document discusses the business cycle and its key stages and features. It defines the business cycle as the fluctuations in economic activity around its long-term trend, involving periods of growth and periods of decline. The main stages are identified as boom, recession, slump, and recovery. Other key points covered include the periodicity and self-reinforcing nature of business cycles as well as different theories that attempt to explain the causes of the cycle such as monetary, fiscal policy, innovation, and overproduction theories.
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This document outlines the structural theory of inflation in less developed countries. It discusses how structural defects and bottlenecks exist in these economies that cause inflation, making the traditional quantity theory of money not applicable. Three main types of bottlenecks are described: agricultural bottlenecks due to issues like land ownership that limit food production growth; government resource constraints that force them to print money to fund infrastructure projects leading to inflation; and foreign exchange bottlenecks from low exports and high import payments causing currency devaluations and price increases. The structural theory argues these bottlenecks must be addressed through balanced investment instead of just monetary or demand-side policies to effectively reduce inflation in less developed economies.
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The document summarizes the Heckscher-Ohlin (H-O) theory of international trade. The H-O theory states that countries will export goods that use their abundant and cheap factors of production intensively and import goods that use their scarce factors intensively. It assumes countries differ in their endowments of capital and labor. The theory shows that capital-abundant countries will export and produce capital-intensive goods, while labor-abundant countries will export and produce labor-intensive goods. The theory represents an improvement over previous theories in explaining the basis of trade between countries within a general equilibrium framework.
1 say's law of markets
1. Say's law of markets states that supply creates its own demand and that full employment is the norm in economies.
2. The document outlines the key assumptions and implications of Say's law, including that production generates income to purchase goods, saving and investment automatically equalize, and wages adjust to maintain full employment.
3. Keynes criticized Say's law for failing to account for the possibility of overproduction and unemployment, and argued that demand does not necessarily increase with supply and that intervention may be needed to stimulate demand.
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The document summarizes the Prebisch-Singer thesis, which argues that terms of trade tend to deteriorate against primary commodities and in favor of manufactured goods over time. It presents the key assumptions of the thesis, including that income elasticity of demand is greater for manufactured goods than primary products. As a result, as incomes rise in developed countries, demand shifts away from primary commodities exported by developing countries towards manufactured goods produced in developed nations. This leads to a long-term decline in terms of trade for developing country exports.
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Theories of trade cycle
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Business cycles show periodic fluctuations in economic activity, measured by indicators like production, employment, and income. There are four phases of a business cycle: expansion, peak, contraction/recession, and trough. Expansions involve growth while contractions involve declines. Business cycles are caused by factors like changes in investment levels, consumer and business expectations, and technological innovations. Theories like Keynes' emphasize how fluctuations in investment can drive cycles, while real business cycle theory sees cycles arising from supply-side shocks. Cycles affect the economy through impacts on areas like growth, inflation, and unemployment. Policy tools can help control the amplitude of cycles.
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This document outlines the structural theory of inflation in less developed countries. It discusses how structural defects and bottlenecks exist in these economies that cause inflation, making the traditional quantity theory of money not applicable. Three main types of bottlenecks are described: agricultural bottlenecks due to issues like land ownership that limit food production growth; government resource constraints that force them to print money to fund infrastructure projects leading to inflation; and foreign exchange bottlenecks from low exports and high import payments causing currency devaluations and price increases. The structural theory argues these bottlenecks must be addressed through balanced investment instead of just monetary or demand-side policies to effectively reduce inflation in less developed economies.
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R.G. Hawtrey viewed business cycles as purely monetary phenomena caused by fluctuations in bank credit and money supply. He argued that expansions are caused when banks lower interest rates and expand credit, stimulating borrowing by traders. This leads to increased production, income, spending and demand in a self-reinforcing cycle. Contractions occur when banks tighten credit due to depleted reserves, raising rates and curbing borrowing. This causes falling demand, income, production, prices and profits in a deflationary spiral. Hawtrey saw uncontrolled credit as the root cause of instability, and argued that controlling credit would regulate economic fluctuations.
HO THEORY MODERN THEORY OF INTERNATIONAL TRADE
The document summarizes the Heckscher-Ohlin (H-O) theory of international trade. The H-O theory states that countries will export goods that use their abundant and cheap factors of production intensively and import goods that use their scarce factors intensively. It assumes countries differ in their endowments of capital and labor. The theory shows that capital-abundant countries will export and produce capital-intensive goods, while labor-abundant countries will export and produce labor-intensive goods. The theory represents an improvement over previous theories in explaining the basis of trade between countries within a general equilibrium framework.
1 say's law of markets
1. Say's law of markets states that supply creates its own demand and that full employment is the norm in economies.
2. The document outlines the key assumptions and implications of Say's law, including that production generates income to purchase goods, saving and investment automatically equalize, and wages adjust to maintain full employment.
3. Keynes criticized Say's law for failing to account for the possibility of overproduction and unemployment, and argued that demand does not necessarily increase with supply and that intervention may be needed to stimulate demand.
Hypothesis of secular deterioration of terms of trade
The document summarizes the Prebisch-Singer thesis, which argues that terms of trade tend to deteriorate against primary commodities and in favor of manufactured goods over time. It presents the key assumptions of the thesis, including that income elasticity of demand is greater for manufactured goods than primary products. As a result, as incomes rise in developed countries, demand shifts away from primary commodities exported by developing countries towards manufactured goods produced in developed nations. This leads to a long-term decline in terms of trade for developing country exports.
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General equilibrium theory posits that all markets, including both product and factor markets, will reach equilibrium simultaneously. This equilibrium will be Pareto optimal, meaning no individual can be made better off without making another worse off due to optimal resource allocation. The model assumes perfect competition, constant returns to scale, and that equilibrium is determined by price adjustments across interconnected markets.
Classical theory of employment
In Macroeconomics Income and Employment are interchangeable terms, since in the short-run National income depends on the total volume of employment or economic activity in the country. As income and employment are synonymous the employment theory is also called income theory.
It should be clear to readers that the classical economists did not formulate any specific theory of employment as such. They only laid down certain postulates which subsequently developed as a theory.
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1) The theory of balanced growth states that all sectors of the economy should grow simultaneously and harmoniously, requiring balance between demand and supply. Rosenstein-Rodan, Ragnar Nurkse, and Arthur Lewis advocated this approach.
2) Hirschman proposed unbalanced growth, arguing that strategic investments in selected industries or sectors would create new opportunities and stimulate further development. Investments in social overhead capital could encourage later private investments in directly productive activities.
3) Both balanced and unbalanced growth approaches have limitations, such as rising costs, shortages of resources, and difficulties for underdeveloped countries.
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The accelerator theory states that an increase in demand for consumer goods will lead to an increase in demand for capital goods used to produce those consumer goods. It explains the relationship between consumer goods industries and capital goods industries. The accelerator coefficient is the ratio of change in investment to change in consumption or output. The accelerator theory was introduced by T.N. Carver in 1903 and further developed by economists like Harrod, Solow, Samuelson and Hicks to explain business cycles. It assumes a constant capital-output ratio and elastic supply of credit and resources so investment can adjust to changes in demand.
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2) The model suggests that manager's utility depends on three variables: staff expenditures which boost sales and prestige; management emoluments such as perks; and discretionary investments for ego and pride.
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The economists Richard Lipsey and Kelvin Lancaster showed in 1956, that if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the values that would otherwise be optimal.
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Alternative theories include the real bills doctrine and the more recent fiscal theory of the price level.
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The document discusses several economic growth models:
1) The Harrod-Domar model which expanded Keynesian analysis to the long-run and analyzed investment's role in creating output capacity.
2) The Roy Harrod and Evsey Domar models which also expanded Keynesian analysis and emphasized investment's dual role of generating income and increasing productive capacity.
3) The Solow growth model which views capital accumulation and labor as the drivers of economic growth assuming full employment and perfect competition. Technological progress is treated as exogenous.
4) The Meade model which incorporates natural resources and technological progress as additional factors influencing economic growth.
Slutsky theorem
1) Slutsky's theorem states that the total price effect on demand for a good is equal to the sum of the substitution effect and the income effect from a price change.
2) The substitution effect measures how demand changes due to consumers substituting between goods in response to the price change, holding their real income constant.
3) The income effect measures how demand changes in response to the change in purchasing power from the price change, holding utility constant.
4) According to Slutsky's theorem, the total change in demand from a price change can be decomposed into these two separate effects.
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The document provides information about terms of trade including:
- Terms of trade measures the price of a country's exports relative to its imports. It is calculated as the index of export prices divided by the index of import prices.
- Types of terms of trade include net barter, gross barter, income, single factorial, double factorial, real cost, and utility terms of trade. Each type has strengths and limitations in measuring trade.
- Factors influencing terms of trade include the elasticity of demand and supply for exports and imports, as well as the relative size of demand for exports and imports. Changes in terms of trade can impact standards of living, import prices, and a country's balance of payments.
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trade cycle
A trade cycle consists of a series of exchanges between a customer and supplier. It includes finding appropriate goods or services, placing an order, taking delivery, and making payment. The trade cycle supports pre-sales activities like finding a supplier, order execution, settlement through payment, and after-sales activities like service, warranty, or complaints. It has phases for search and negotiation, order and delivery, and a final service and warranty phase.
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General equilibrium theory posits that all markets, including both product and factor markets, will reach equilibrium simultaneously. This equilibrium will be Pareto optimal, meaning no individual can be made better off without making another worse off due to optimal resource allocation. The model assumes perfect competition, constant returns to scale, and that equilibrium is determined by price adjustments across interconnected markets.
Classical theory of employment
In Macroeconomics Income and Employment are interchangeable terms, since in the short-run National income depends on the total volume of employment or economic activity in the country. As income and employment are synonymous the employment theory is also called income theory.
It should be clear to readers that the classical economists did not formulate any specific theory of employment as such. They only laid down certain postulates which subsequently developed as a theory.
Balanced & unbalanced growth
1) The theory of balanced growth states that all sectors of the economy should grow simultaneously and harmoniously, requiring balance between demand and supply. Rosenstein-Rodan, Ragnar Nurkse, and Arthur Lewis advocated this approach.
2) Hirschman proposed unbalanced growth, arguing that strategic investments in selected industries or sectors would create new opportunities and stimulate further development. Investments in social overhead capital could encourage later private investments in directly productive activities.
3) Both balanced and unbalanced growth approaches have limitations, such as rising costs, shortages of resources, and difficulties for underdeveloped countries.
Accelerator Theory
The accelerator theory states that an increase in demand for consumer goods will lead to an increase in demand for capital goods used to produce those consumer goods. It explains the relationship between consumer goods industries and capital goods industries. The accelerator coefficient is the ratio of change in investment to change in consumption or output. The accelerator theory was introduced by T.N. Carver in 1903 and further developed by economists like Harrod, Solow, Samuelson and Hicks to explain business cycles. It assumes a constant capital-output ratio and elastic supply of credit and resources so investment can adjust to changes in demand.
Philip's Curve
The Phillips curve describes an inverse relationship between unemployment and inflation, such that lower unemployment is associated with higher inflation. While observed to be stable in the short-run, it does not hold in the long-run. The document discusses the origins of the Phillips curve from William Phillips' 1958 paper and subsequent modifications by economists like Friedman and Phelps who argued it does not reflect long-run economic realities. It also examines shifts to the Phillips curve from supply shocks and how the relationship between unemployment and inflation is now understood with incorporation of inflation expectations.
Williamson’s model of managerial discretion
1) Williamson's model of managerial discretion posits that in imperfect markets, managers will seek to maximize their own utility rather than profits for owners.
2) The model suggests that manager's utility depends on three variables: staff expenditures which boost sales and prestige; management emoluments such as perks; and discretionary investments for ego and pride.
3) Managers have an area of discretion between the actual profits earned and the minimum profits expected by owners, within which they can allocate resources to maximize their own satisfaction defined by the three variables.
Theory of the second best
In economics, the theory of the second best concerns the situation when one or more optimality conditions cannot be satisfied.
The economists Richard Lipsey and Kelvin Lancaster showed in 1956, that if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the values that would otherwise be optimal.
Politically, the theory implies that if it is infeasible to remove a particular market distortion, introducing a second (or more) market distortion may partially counteract the first, and lead to a more efficient outcome.
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Cournot's Duopoly model
This document summarizes the Cournot duopoly model of market competition between two firms. It explains that under Cournot's assumptions, the two firms will each capture 1/3 of the market share and settle at an equilibrium price point between the competitive and monopoly prices. The model involves the firms reacting to each other's output and price decisions in successive rounds until they split the market evenly. Some criticisms of the model are that it assumes costless production and does not allow for new firm entry or learning over time.
6. joan robinson's model
Joan Robinson developed growth models that rejected many neoclassical assumptions. Her models considered capital as durable and heterogeneous, not easily substitutable for labor. She argued the value of capital depends on distribution and cannot be estimated without knowing interest rates. Robinson built multiple models to analyze growth under different economic conditions. Her key model showed the relationship between the actual and desired rates of accumulation and profit. Steady growth required these rates to be equal, but various factors could cause them to diverge, making sustained steady growth difficult to achieve.
Bain’s limit pricing model
The document discusses Bain's limit pricing model. It states that under Bain's model, oligopoly firms do not maximize profits in the short run due to fear of attracting potential new entrants. Instead, firms fix a price on the inelastic portion of the demand curve called the limit price, which is the highest price that deters new firm entry. The limit price allows existing firms to earn abnormal profits above competitive levels but below monopoly profits, maintaining market stability. Diagrams are included showing the limit price between the perfect competition and monopoly price points.
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This document outlines the Absolute Income Hypothesis theory presented by Keynes in 1936. The theory states that as absolute income increases, the proportion of that income spent on consumption decreases. So while consumption increases with more income, the rate of increase declines. Key points include consumption (C) increasing at a decreasing rate as income (Y) rises, the average propensity to consume (APC) decreasing as income rises, and the theory showing consumption-income relationships in both the short run and long run.
The theory of balanced growth
The theory of balanced growth proposes that simultaneous investments should be made across multiple industries in order to spur economic development. This would enlarge the market and incentivize more investment. Theorists like Lewis, Ghosh, Ragnar, and List discussed balanced growth in terms of maintaining balance between industry and agriculture, consumption and investment, and domestic versus foreign trade. Balanced growth is argued to promote inclusive, balanced regional development through specialization and creation of infrastructure, but critics note the challenges of coordinated planning and resource constraints in developing countries.
Theories of the Consumption Function 1
Macro Economics: Keynesian consumption function, Kuznets' paradox, Duesenberry Relative Income hypothesis
Harrod domer model PPT
The Harrod-Domer model theorizes that a country's economic growth rate is defined by its savings level and capital-output ratio. It suggests there is no natural balanced growth. The model was developed independently by Roy Harrod and Evsey Domar to explain growth in terms of savings and capital productivity. It requires continuous net investment to sustain real income and production growth. The model's assumptions include no government intervention, full initial employment, a closed economy, fixed capital-labor ratios and constant savings and interest rates. Its main criticism is the unrealistic assumption of no reason for sufficient growth to maintain full employment.
Quantity Theory of Money
In monetary economics, the quantity theory of money (QTM) states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply. The theory was challenged by Keynesian economics,but updated and reinvigorated by the monetarist school of economics. While mainstream economists agree that the quantity theory holds true in the long run, there is still disagreement about its applicability in the short run. Critics of the theory argue that money velocity is not stable and, in the short-run, prices are sticky, so the direct relationship between money supply and price level does not hold.
Alternative theories include the real bills doctrine and the more recent fiscal theory of the price level.
Theories of economic growth
The document discusses several economic growth models:
1) The Harrod-Domar model which expanded Keynesian analysis to the long-run and analyzed investment's role in creating output capacity.
2) The Roy Harrod and Evsey Domar models which also expanded Keynesian analysis and emphasized investment's dual role of generating income and increasing productive capacity.
3) The Solow growth model which views capital accumulation and labor as the drivers of economic growth assuming full employment and perfect competition. Technological progress is treated as exogenous.
4) The Meade model which incorporates natural resources and technological progress as additional factors influencing economic growth.
Slutsky theorem
1) Slutsky's theorem states that the total price effect on demand for a good is equal to the sum of the substitution effect and the income effect from a price change.
2) The substitution effect measures how demand changes due to consumers substituting between goods in response to the price change, holding their real income constant.
3) The income effect measures how demand changes in response to the change in purchasing power from the price change, holding utility constant.
4) According to Slutsky's theorem, the total change in demand from a price change can be decomposed into these two separate effects.
Liquidity preference theory
Keynes' liquidity preference theory holds that individuals and firms demand to hold cash, or liquidity, for three main motives: transaction, precautionary, and speculative. The transaction motive refers to holding cash for daily transactions, while the precautionary motive involves holding cash as a buffer against unexpected events. The speculative motive refers to holding cash in order to take advantage of anticipated price changes in bonds and securities. Together these three motives determine the overall demand for money, or liquidity preference, in the economy. The interest rate is determined by the interaction of liquidity preference and the fixed money supply. When liquidity preference is very high, so that demand for money vastly exceeds supply even at very low interest rates, monetary policy
Terms of-trade
The document provides information about terms of trade including:
- Terms of trade measures the price of a country's exports relative to its imports. It is calculated as the index of export prices divided by the index of import prices.
- Types of terms of trade include net barter, gross barter, income, single factorial, double factorial, real cost, and utility terms of trade. Each type has strengths and limitations in measuring trade.
- Factors influencing terms of trade include the elasticity of demand and supply for exports and imports, as well as the relative size of demand for exports and imports. Changes in terms of trade can impact standards of living, import prices, and a country's balance of payments.
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A trade cycle consists of a series of exchanges between a customer and supplier. It includes finding appropriate goods or services, placing an order, taking delivery, and making payment. The trade cycle supports pre-sales activities like finding a supplier, order execution, settlement through payment, and after-sales activities like service, warranty, or complaints. It has phases for search and negotiation, order and delivery, and a final service and warranty phase.
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The document discusses the nature and phases of trade cycles. Trade cycles refer to fluctuations in economic activity over months or years. There are four phases - expansion/boom, recession, depression/contraction, and recovery/revival. The expansion phase sees high investment, output, employment and prices. The recession phase brings falling income, output, prices and rising unemployment. Depression is characterized by mass unemployment, low output and prices. Recovery occurs when investment and output begin rising again. Governments use monetary and fiscal policy to reduce the impact of trade cycle fluctuations.
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2. Hawtrey's monetary theory argues that business cycles are caused by the expansion and contraction of bank credit, which increases or decreases monetary demand and leads to boom or recession periods.
3. Schumpeter's theory is that innovation drives economic fluctuations as entrepreneurs introduce new products and technologies, initially disrupting existing equilibrium and business patterns before new stability emerges.
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The document defines the business cycle as alternating periods of economic prosperity and depression. It describes the main features as being pervasive, recurrent but not periodic, and persistent. The phases of the business cycle are growth, peak, recession, trough, and recovery. It provides details on the characteristics and causes of each phase, such as growth involving increasing sales, production, employment, and income, while recessions involve declining output, income, employment, and trade. The business cycle is caused by factors like interest rates, housing prices, and consumer confidence, and governments try to control it through fiscal, monetary, and other economic policies.
Trade cycle
The document defines a trade cycle as periods of good and bad trade characterized by rising/falling prices and low/high unemployment. It lists the key features of trade cycles like periodic waves in economic activity with different phases of prosperity, recession, depression, and recovery. Various theories of trade cycles are also discussed, including endogenous theories like innovations theory and psychological theory, and exogenous theories like weather theory. The four phases of business cycles - prosperity, recession, depression, and recovery - are explained in detail. Different methods to control business cycles are also mentioned, like monetary policy, fiscal policy, and automatic stabilizers.
Theories of trade cycle
1) The business cycle refers to periodic fluctuations in economic activity between periods of expansion and contraction.
2) It involves four phases - prosperity, peak, downturn/recession, and recovery.
3) Various theories have been proposed to explain the business cycle, including the monetary, psychological, innovation, and Keynesian theories.
4) Keynes argued that decreases in aggregate demand are the primary cause of depression and unemployment. Investment can be used to increase aggregate demand and reduce downturns in the short run.
Theories of strong sustainability
Environmental economics, strong and very strong sustainability theories, natural capital, ecosystems, resilience
Baumol’s theory of sales maximisation
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Measurement of national income
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Measurement of National Economy
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Commercial banks
This document summarizes commercial banking in Pakistan. It defines commercial banks and notes that they operate under the Banking Companies Ordinance of 1962. It provides details on the nationalization of banks in Pakistan in 1974 and the consolidation of smaller banks into larger nationalized commercial banks. The document also discusses the establishment of specialized banks like the Women's Bank and the Zarai Taraqiati Bank and provides examples of major commercial banks currently operating in Pakistan.
Inflation
Inflation is defined as a general increase in prices of all commodities over time. There are different types of inflation classified by rate of increase such as cost-push, demand-pull, structural, and imported inflation. Countries experience high inflation rates for various reasons including excess money supply growth, high government spending, shortages, and decreasing productivity. Inflation is measured using price indices and governments employ monetary, fiscal, and administrative policies to control inflation including controlling money supply, government spending, prices and wages. Indexing links wages and prices to inflation indexes to offset the impact of rising costs of living.
Phases of business cycle
The document discusses business cycles, also known as trade cycles. It defines them as alternating periods of economic expansion and contraction. Expansion periods are times of high income, output, and employment, also called prosperity. Contraction periods are times of low income, output, and employment, also called recessions. The business cycle involves four phases - prosperity, recession, depression, and recovery - as the economy fluctuates between expansion and contraction over time.
Types and causes of business cycle
The document discusses different types of business cycles including minor cycles that occur every 40 months, major cycles that occur every 9-10 years between crises, and very long cycles that span over 50 years. It also mentions Kuznets cycles that generally occur every 7-11 years and building cycles that range from 15-20 years. The causes of business cycles discussed include monetary effects from expansion and contraction of bank credit, purchasing power issues from oversaving and underconsumption, overinvestment, human psychology, and cyclical weather changes affecting agriculture.
12680 l.n. ppt. types of inflation
Demand pull inflation occurs when aggregate demand grows faster than the potential output or supply of the economy. This can be caused by increases in consumer spending, investment, government spending, or exports. It leads to inflation if demand outpaces supply. Cost push inflation arises when costs like wages increase, shifting the aggregate supply curve to the left and increasing prices. This type of inflation can contribute to stagflation, a period of high inflation combined with high unemployment.
Inflation
This document discusses inflation including its causes, types, and effects. Inflation is defined as a rise in general price levels over time which reduces purchasing power. Common causes of inflation include increases in the money supply, credit expansion, deficit financing, and artificial scarcity. The main types of inflation are demand-pull, caused by excessive demand, and cost-push, caused by increased input costs. Effects of inflation impact debtors, those with fixed incomes, consumers, producers, farmers, taxpayers, and governments. The document also includes a map of inflation rates worldwide and a report on rising food inflation forecasts.
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Schumpeter theory of trade cycle
Schumpeter's theory of economic development focuses on the role of entrepreneurs in driving creative destruction and the business cycle. Entrepreneurs spur development by introducing new products, production methods, markets, materials, and industrial rearrangements. This leads to periods of economic prosperity but also creates imbalances that result in recession as unsuccessful businesses close. According to Schumpeter, capitalist economies experience alternating periods of boom and bust as entrepreneurs innovate and create new equilibriums at higher levels of output and income, though social disruption may also occur.
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This document discusses business cycles and theories of business cycles. It defines business cycles as alternating periods of economic prosperity and depression, characterized by fluctuations in production, prices, employment, and other economic indicators. Several theories of business cycles are presented, including monetary, psychological, overproduction, underconsumption, innovation, and accelerator theories. The multiplier-accelerator model is described as a way fluctuations can be generated through the interaction of investment, consumption, and aggregate demand. Methods to control business cycles discussed include monetary policy, fiscal policy, and automatic stabilizers.
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Aggregate+demand+&supply
The document discusses key macroeconomic concepts including aggregate demand, aggregate supply, the consumption function, investment function, and the multiplier. It provides the following key points:
- Aggregate demand is the total demand for final goods and services in an economy. It is affected by factors like money, taxes, prices, and trade.
- Aggregate supply represents the maximum output an economy can produce at full employment. It can shift due to changes in inputs like labor, capital, technology and costs.
- The consumption function explains autonomous and induced consumption and how consumption relates to disposable income based on the marginal propensity to consume.
- The investment function depends on interest rates, profit expectations and taxes, and
Trade cycle or business cycle with case study
This document discusses the key aspects of trade cycles including:
1. It defines trade cycles as fluctuations in economic activity over time, encompassing periods of expansion and contraction that affect production, employment, investment and prices in irregular intervals.
2. It outlines the main phases of trade cycles as expansion, peak, contraction and trough and describes the characteristics of each phase.
3. It identifies several causes of trade cycles including overinvestment, underconsumption, changes in money supply, government policies, and external factors like wars and weather.
4. It discusses tools for measuring and controlling trade cycles through monetary policy, fiscal policy, and other macroeconomic stabilization policies.
Schumpeter theory of economic development
Schumpeterian theory views economic development as resulting from "new combinations" introduced through innovations. These innovations disrupt equilibrium and are introduced by entrepreneurs seeking profits. Entrepreneurs are financed through bank credit expansion, fueling investment and economic growth. However, this leads to a boom-bust cycle as old industries are displaced. Over time, capitalism decays due to weakening entrepreneurship, family institutions, and property rights, transitioning toward socialism. Critics argue Schumpeter overstates the role of idealized innovators and the cyclical nature of innovation-driven changes.
schumpeterpresentation-120213195241-phpapp02.pdf
1) Schumpeter's theory of economic development argues that development occurs through "new combinations" introduced by entrepreneurs in the form of innovations, disrupting equilibrium.
2) These innovations include new products, production methods, markets, materials, or organizations and are aimed at earning profits for the innovating entrepreneur.
3) The innovations are financed through bank credit expansion, stimulating economic growth through increased investment, incomes, and demand in a cyclical process eventually leading to structural change away from capitalism.
Business+cycles
The business cycle refers to the periodic but irregular up and down movements in economic activity, as measured by real GDP. Business cycles involve alternating periods of expansion (boom) and contraction (recession or depression). Recent cycles have become less severe, with expansions lasting longer and contractions shorter on average. The four main phases of the business cycle are recession, depression, recovery, and boom. Leading economic indicators can provide insight into where the economy may be in the business cycle around 12-15 months in the future.
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Business cycles are short-run fluctuations in aggregate economic activity around its long-run growth path. They consist of peaks, contractions or recessions, troughs, and recoveries and expansions. Key macroeconomic variables like production, consumption, investment, employment, money supply, stock prices, and interest rates behave differently in the business cycle, either moving pro-cyclically, counter-cyclically, or with no clear pattern. The interaction between the multiplier and accelerator effects shape the overall business cycle as initial changes trigger further rounds of spending.
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Inflation - causes and measurement
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Health Economics
1) Health economics lies at the interface between health/medicine and economics. It applies economic principles to issues relating to health.
2) Resources for the health sector are limited, so health economics studies how scarce resources are allocated among alternative uses in health care at both the micro and macro levels. This involves weighing the costs and benefits of different options.
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Business and Trade cycles
- 1. BUSINESS AND TRADE CYCLES Prof. Prabha Panth, Osmania University, Hyderabad
- 2. WHAT IS A TRADE CYCLE • Trade or Business cycles are regular and periodic changes in the trend of economic activity in capitalist or market based economies. Features: – Occur periodically, – Regular fluctuations in NY and Employment of an economy, – Period of rising economic activity, followed by periods of falling economic activity. – Wave like movement of expansion and contraction – Trend changes over sufficient period of time – not a random change PRABHA PANTH
- 3. Diagram of Trade Cycle GDP YEARS First Phase: Peak or Boom – Full employment Third Phase: Depression Fourth Phase – Trough, Unemployment 0 Trade Cycle GDP PRABHA PANTH
- 4. Theories of Trade Cycles 1. Schumpeter: Innovations Theory: Business cycles caused by the “Innovations” activity of capitalists. Trade cycle caused due to technical change. This is a form of economic progress of industrial economies. Innovations consist of: a) Changes in combinations of factors of production b) Changes in business organisation c) Transport d) New products e) New markets f) New inputs PRABHA PANTH
- 5. – Innovation means the application of inventions on a commercial scale in the economy. – Inventions go on continuously in the laboratory, – But applied to the market only periodically – they are discontinuous, because business not ready to take risks of new product or process. – Innovations are lumpy – they can function only on a large scale. – Leads to surge in industrial investment. – The economy moves into the period of ‘boom’ PRABHA PANTH
- 6. – An innovator is one who is the first to commercially use a new invention. – Takes the risk of the new product or process, and its marketing. – Profits are payments to innovators or entrepreneurs. – others imitate his product or process. – Investment increases, and the economy surges upwards. – This is the First Phase: Prosperity and Boom. – Investment , income and employment also. PRABHA PANTH
- 7. – But with too much competition – price cutting takes place. Profits start falling. – New opportunities in this area start decreasing. – Market is over supplied – not enough demand. – Investments start falling, also employment and income. – This is the Second Phase of the Trade Cycle – Recession. – The economy goes into depression – Third Phase, – At the lowest point, when prices are very low, businessmen may start the process of innovations again, – This leads to the Fourth Phase: Recovery PRABHA PANTH
- 8. • Criticism: – Innovations may not occur so periodically. – If there are no innovations, will not recovery take place? – Monopoly and Patents may prevent use of innovations by other competitors, – Innovations may not cause surge and full employment, but lead to small changes. – Adjustment of the economy to innovations takes time. – Recovery may not be automatic, but requires govt policy PRABHA PANTH
- 9. 2. Samuelson’s Multiplier-Accelerator Theory: - Interaction between the Multiplier k = 1/mps, and Accelerator v = I/∆Y results in Trade cycles. Consumption functionCt = c0 + bYt-1 present consumption is a function of past income (with b as the marginal propensity to consume) • Investment is composed of two parts: It = I0 + v(Ct - Ct-1) I0 = autonomous investment, v (Ct - Ct-1) = investment induced by changes in consumption demand (the "acceleration" principle) PRABHA PANTH
- 10. Yt = Ct + It • But Ct = bYt-1 • I = I0 + v (Ct - Ct-1) or Autonomous investment + Induced investment So: Yt = bYt-1 + I0 + v (Ct - Ct-1) Changes in Y will depend on the values of b and v. The greater the value of v, the more the fluctuations in income. Where: 0 < b < 1 i.e. MPC And v > 0 PRABHA PANTH
- 11. Multiplier: When Autonomous Investment increases, Y will increase. Accelerator: When Y increases, C increases, and encourages Induced investment. Again the Multiplier will start working – and explosive situation will occur. The Accelerator and Second order lag are necessary to generate a trade cycle. Soon the negative effect [v(Ct − Ct-1)] will reduce Inv. Investment falls, then the recession will start. After the trough is reached, the low value of (− Ct-1 ) will increase Induced Investment once again. PRABHA PANTH
- 12. • Criticism: 1) Shows the important role of Autonomous Investment in the Trade cycle 2) Induced or private investment is affected by the state of the economy. But: 1) Does not show the role of fiscal and monetary policy to control inflation or deflation, 2) The reason for the recovery is not well explained. PRABHA PANTH
- 13. 3. Hicks theory of Trade Cycles: Trade cycles are fluctuations along the growth path of an economy. Multiplier and Accelerator interactions are important. Warranted rate of growth: real I is rising at the same rate as real S. equilibrium growth path of economy. The fluctuations of NY take place around the steady warranted growth rate of the economy Lagged Consumption function: Ct = fYt-1 Autonomous I not affected by change in Y, exogenous Induced Investment: is affected by ∆C PRABHA PANTH
- 14. HICKS TRADE CYCLE: F = Full capacity growth path E = Equilibrium growth path L = floor growth path A = Autonomous Investment path O u t p u t Time 1 2 3 4 5 6 PRABHA PANTH
- 15. – Increase in Auto I leads to increase in Y and C. – Increase in C induces an increase in investment due to the accelerator, – Autonomous investment continues steadily. – This goes on till the ceiling is reached at 2. – Now there is excess production capacity. – So Investment falls, multiplier works in reverse direction, and Y and C falls. – Accelerator cannot work during the down swing. – Due to Auto Inv, again recovery takes place. PRABHA PANTH
- 16. Criticism: • Hicks showed that trade cycles takes place around the steady growth of the economy, But: • Cannot explain why the actual growth is different from the steady growth path, • Cannot show how recovery of the economy takes place. • Does not show the role of fiscal policy – taxation, or public expenditure on the economy, • Does not show the role of monetary policy – changes in rate of interest, supply of money, credit, etc. PRABHA PANTH