Hicksian Theory of Trade Cycle: Economics Theory

Hicksian Theory of Trade Cycle

  • J.R Hicks attributed the theory of the business cycle by explaining the combined action of multiplier and accelerator.
  • The multiplier is the ratio of the change in income to the change in investment.
  • The accelerator is the ratio of change in consumption on investment.
  • So theory of trade cycle based Warranted Rate of Growth, Induced and autonomous investment and Multiplier and Accelerator.
  • According to him, there are two types of investments that Autonomous Investment and Induced Investment.
  • Autonomous investment, which to Hicks represents the growth factors due to the increase of population and the progress of technology, plays an important role in the determination of the trade cycle.

Q. Explain Hicksian Theory of Trade Cycle /Discuss Hicksian Theory of Trade Cycle

  • J.R Hicks attributed the theory of the business cycle by explaining the combined action of multiplier and accelerator.
  • The multiplier is the ratio of the change in income to the change in investment.
  • The accelerator is the ratio of change in consumption on investment.
  • So theory of trade cycle based Warranted Rate of Growth, Induced and autonomous investment and Multiplier and Accelerator.
  • According to him, there are two types of investments that Autonomous Investment and Induced Investment.
  • Autonomous investment, which to Hicks represents the growth factors due to the increase of population and the progress of technology, plays an important role in the determination of the trade cycle.

Assumptions Hicksian Theory of Trade Cycle

  • There is a progressive economy in which autonomous investment is increasing at a regular rate.
  • There is a time lag of the investment, which means the investment will impact futures, not in the current period.
  • It is impossible to increase output beyond the full employment level.
  • The Value of Multiplier and accelerator is fixed. Throughout the different phases of a cycle, i.e. consumption function and investment function remain constant.

Upswing Downswing—Upper and Lower Turning Points:

  • The upper turning point of income is determined by the availability of resources like population, technology, capital stock, etc. The process of expansion hits against the ceiling and turns down the downswing starts even before the ceiling is touched.
  • The decline in investment in the downswing but the decline cannot continue indefinitely because of the lower limit, which depends upon the fact that gross investment cannot fall below zero.
Hicksian Theory of Trade Cycle
Hicksian Theory of Trade Cycle
  1. AA shows the path of autonomous investment growing at a constant rate.
  2. EE is the equilibrium level of output which depends on AA
  3. Line FF is the full employment ceiling (restriction) level above the equilibrium path EE and is growing at the constant rate of autonomous investment.
  4. LL is the lower equilibrium path of output representing the floor.
  5. Hicks begins from a cycle less situation PQ on the equilibrium path EE when an increase in the rate of autonomous investment leads to an upward movement in income. As a result, the growth of output and income propelled by the combined operation of the multiplier and accelerator moves the economy on to the upward expansion path from Po to P1.
  6. When the economy hits the full employment ceiling at P1 it will creep along with the ceiling for a period of time to P2 and the downward swing will not start immediately. The economy will move along the ceiling from P1 to P2 depending upon the time period of the investment lag.
  7. The greater the investment lag, the more the economy will move along the ceiling path.
  8. During the downswing, “the multiplier-accelerator mechanism sets in reverse, falling investment reducing income, reduced income reducing investment, and so on, progressively.
  9. If the accelerator worked continuously, the output would plunge downward below the equilibrium level EE, and because of explosive tendencies, to a greater extent than it rose above it.”
  10. The fall in output in this case might be a steep one, as shown by P2 P3 Q. But in the downswing, the accelerator does not work so swiftly as in the upswing.

 

Hicksian Theory of Trade Cycle, Hicks’ Theory of Trade Cycles, Hick’s Theory of Trade Cycle for Business Economic Notes Click Here

Reference: Economic discussion, Yarticles, and HL Ahuja, Smart Notes

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