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Samuelson used two concepts, namely, autonomous and derived investment, to explain his model. (b) Assumes the consumption function given by Samuelson, which is Ct = α Yt-1. This encourages organizations to invest more to develop advanced production techniques and increase production for meeting consumer demand. Consequently, the demand for bank credit also increases. Therefore, theories developed by these traditional theorists are called monetary theory of business cycle. In such a case, total investment and expenditure on products and services is more, the level of production would increase. It represents one-way explosion and results in explosive oscillations, as shown in Figure-8: E: Refers to the point at which the oscillations are of equal amplitude. This is applicable only in the situation of full employment. The decline of the economy can be postponed, if the time lag between output and investment is of three to four years. When the level of production increases, it results in the increase of employment opportunities and income level. However, after a certain point of time, profit shows decline with a decrease in output prices. Autonomous investment leads to multiplier effect that result in derived investment. In addition, he assumed that there would be no government activity and foreign trade in the economy. When the road was clear, trade interacted dialectically with profit-making potential in production to push the upswing higher. Veblen developed a theory of firms’ life cycle to explain market fluctuations; Mitchell devised empirical tools to study their inner motion and to monitor them. A theory of the trade cycle has to explain both why production can expand over a period of time in spite of the underlying permanent contradiction between the increasing productive power and the limited consumption capacity, and why this contradiction must in the end find expression in a violent crisis. When banks stop providing credit, it reduces investment by businessmen. Between 1951-3 and 1969-71 the volume of world trade in manufactures grew by 349% whereas the volume of output grew by 194%” (ibid. d) Maturity. The work of Thorstein Veblen and Wesley Mitchell has a prominent position in business cycle theory. The direction of China’s foreign trade has undergone marked changes since the early 1950s. Ignores other factors that influence business cycles, such as expectations of businessmen and taste and preferences of customers. The time lag in consumption occurs due to the gap between income and expenditure and gap between Gross National Product (GNP) and non-wage income. Product Life Cycle is defined as, “the cycle through which every product goes through from introduction to withdrawal or eventual demise.” Image Title: Product Life Cycle Stages. According to Schumpeter said, “Business cycles are almost exclusively the result of innovations in the industrial and commercial organization. Introduction: In the early stage when the product is introduced in a market, sales revenue begins to grow but the rate of growth is very slow. Monetary Over-Investment Theory 3. Definition: Profit, also called net income, is the amount of earnings that exceed expenses for the period.In other words, it’s the amount of income left over after all the necessary and matched expenses are subtracted for the period. When the economy is going through different phases of business cycles, the income is redistributed that affects the marginal propensity to consume, which further affects the multiplier process. Welcome to EconomicsDiscussion.net! This encourages investors (including individuals and organizations) to invest. b. The traditional business cycle theorists take into consideration the monetary and credit system of an economy to analyze business cycles. According to the prevailing characteristics of the environment, organisms will exhibit an ―r‖ or ―k‖ strategy. As a result, the demand for consumer and capital goods decreases. In his theory of business cycles, Keynes advocated that the total demand helps in the determination of various economic factors, such as income, employment, and output. Samuelson’s Model of Multiplier Accelerator Interaction 6. Hawtrey, the main supporter of this theory, advocated that business cycles are the continuous phases of inflation and deflation. This is because the rate of decrease in the marginal efficiency of capital is more than that of current rate of interest. FF line expresses the full employment or the peak phase of economy, while LL line expresses the trough phase of an economy. During the path Q1Q2, the induced investment is nil while autonomous investment is less than normal. Keynes Theory 5. Pure Monetary Theory 2. The life cycle of a product is broken into four stages—introduction, growth, maturity, and decline. In addition, autonomous investment is used for replacing capital goods. On the other hand, it decreases due to various reasons, such as decrease in prices, increase in costs, and inefficiency of the production process. This leads to depression in the economy. Assumes that when the market rate of interest is lower than the natural market rate of interest, the bank credit flows to the capital goods industry. On the basis of this belief, investors take large amounts of money from banks. Theory of overlapping demands c. Economies of scale theory d. Product life cycle theory This paper explores the evolution of business cycle theories from early studies of exogenous shocks in economic performance to syntheses of endogenous explanations by Veblen and Mitchell. Samuelson’s Model of Multiplier Accelerator Interaction 6. This is an important consequence of global value chains, but we cannot understand it if we use a model in which real GDP movements are simply decomposed into changes in technology and factor supply. Ignores the accelerator ’ s income own demand visitors like YOU steady growth line a few the. On this site, please read the following reasons: a ) Development 's to... A lag of one year starts increasing again with the help of of. Undergone marked changes since the early 1950s own demand the recent increase in output produces induced investment is three... 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