He has also developed a concept of multiplier that represents changes in income level produced by the changes in investment.Keynes also advocated that the expansion of business cycle occurs due to increase in marginal efficiency of capital. Without practical evidence, the accelerator and multiplier cannot be assumed to be constant.c.
He also designed a model having two stages, namely, first approximation and second approximation.Deals with the effect of innovatory ideas on an economy in the beginning. A basis for real business cycle theory is a simple neo-classical model of capital accumulation where individuals seek to invest in capital, and the price of labour will be determined by market forces. As a result, the profit from investments starts Calling due to the increase in the cost of investment and production of goods and services. Samuelson’s model of multiplier accelerator interaction was the first model that represents interaction between these two concepts.In his model, Samuelson has described the way the multiplier and accelerator interact with each other for generating income and increasing consumption and demand of investment. In such a case, investment and savings increase, but the consumption remains unaffected as there is no change in consumer goods industries.Consequently, profit increases with increase in investment opportunities, which further results in an increase in the demand for various products and services.
It is an indicator of the efficiency with which a company is deploying its assets to produce the revenue. In the first half of twentieth century, various new and important concepts related to business cycles come into existence.However, in nineteenth century, many of the classical economists, such as Adam Smith, Miller, and Ricardo, have conducted a study on business cycles. Innovations are such changes of the combination of the factors of production as cannot be effected by infinitesimal steps or variations on the margin. Description: Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate under liquidity adjustment facility or LAF in short. Before publishing your Articles on this site, please read the following pages: Description: Institutional investment is defined to be the investment done by institutions or organizations such as banks, insurance companies, mutual fund houses, etc in the financial or real assets of a country.
Hicks explains business cycles by assuming that the economy has reached to Po point of equilibrium path and autonomous investment is the result of innovation. The total demand refers to the demand of consumer and capital goods. Some of the most important theories of business cycles are as follows:1. When the prices start falling, debtors are in the worst situation because they are not able to repay loan and meet their basic needs. In his business cycle theory, Keynes assigns the major role to expectations. [Innovation] consists primarily in changes in methods of production and transportation, or changes in industrial organization, or in the production of a new article, or opening of a new market or of new sources of material.”According to Schumpeter, innovation refers to an application of a new technique of production or new machinery or a new concept to reduce cost and increase profit. Therefore, with decrease in the purchasing power of individuals, the real demand for products does not increase at the same rate at which the investment increases. This is termed as multiplier-acceleration interaction.Samuelson made certain assumptions for the explanation of business cycles.
When the level of production increases, it results in the increase of employment opportunities and income level. In addition, he assumed that there would be no government activity and foreign trade in the economy.According to the assumption given by Samuelson that there would be no government activity and foreign trade, the equilibrium would be achieved whenWhere, b = capital/output ratio (helps in determination of acceleration)With the help of preceding equation, the income level for past and future can be determined if the values of a, b and income of two preceding years are given. In addition, autonomous investment is used for replacing capital goods.
Takes into consideration the abstract theory, which cannot be applied in the real world.Welcome to EconomicsDiscussion.net! A recession is a situation of declining economic activity. For stabilizing this equilibrium, the voluntary savings should be equal to actual investment in an economy.In an economy, generally, the total investment is distributed among industries in such a way that each industry produces products to a limit, so that its demand and supply are equal. As a result, there would be no expansion and contraction and the economy would always be in equilibrium.According to this theory, changes in economic conditions would occur only when the money supply and investment-saving relations show fluctuations.
Description: If the prices of goods and services do not include the cost of negative externalities or the cost of harmful effects they have on the environment, people might misuse them and use them in large quantities without thinking about their ill effects on the envAsset turnover ratio is the ratio between the value of a company’s sales or revenues and the value of its assets. Offers only a systematic framework for business cycles, not the whole concept.The economists of post-Keynesian period emphasized the need of both multiplier and accelerator concepts to explain business cycles.
The duration of such stages may vary from case to case.
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