The clearing up of these interconnections is of primary importance to trade cycle theory, since the discrepancies between the expected yields of existing means of production and the actual yield obtainable from the available liquid capital must necessarily arise in the course of the cycle. Both the protagonists and the opponents of the monetary theory of the trade cycle thus agree in regarding these explanations as falling ultimately within the exogenous and not the endogenous group. These show that the stock of money has displayed a systematic cyclical pattern over the decades. The industrialist will reduce the demand of raw material. It is sufficiently explained by the adjustment of the economic system to irregular changes in the data — changes whose occurrence we always have to assume and which cannot be further explained by economic science.
Features of Business Cycles : Though different business cycles differ in duration and intensity they have some common features which we explain below: 1. Further, we should point out the connection between our theory and a famous thesis of Mr. On the whole, one can say without exaggeration that the practical value of statistical research depends primarily upon the soundness of the theoretical conceptions on which it is based. Gregory has recently shown introduction to Tooke and Newmarch's History of Prices, London, 1928, pp. Forced saving increases only the existing stock of real capital goods, but not necessarily the current supply of free capital disposable for investment — that portion of total income that is not consumed but used as a provision for the upkeep and depreciation of fixed plant. Hayek has suggested that the volume of money supply should be kept neutral to solve the problem of cyclical fluctuations.
People or entities trade because they believe that they benefit from the exchange. Besides Professor Mises's Theorie des Geldes und der Umlaufsmittel we must mention the last chapter of S. The objective of each country was to have a When the value of exports is greater than the value of imports. In fact, its current shape is the result of many different types of that helped it in its evolution through various eras. Fall in income will lead to a decline in demand for goods and services produced by other sectors. This starts the recessionary phase.
On the other hand, if banks raise their rate of interest, producers and traders will reduce their borrowing from banks. Profits and interest rates are zero. If the capital supply from this source is to lower the natural rate of interest, it must not, of course, be offset by a diminution elsewhere — resulting from the decline of other undertakings confronted with the reinforced competition of those newly supplied with capital. This way of stating the position, however, entirely overlooks the fact that every attempt to extend the productive apparatus must necessarily bring about, besides the rise in factor prices, a further checking force: viz. Assumptions of the Theory: The Hicksian theory of trade cycle is based on the following assumptions: 1 Hicks assumes a progressive economy in which autonomous investment increases at a constant rate so that the system remains in a moving equilibrium. There are no savings and investments. These changes of data could serve as a complete explanation only if it could be shown that the successive phases of the trade cycle are conditioned by a series of such changes, following each other in a certain order.
This theory is realistic in the sense that it considers over investment as the cause of trade cycle. Some countries have a disproportionate benefit of some factors. So they use their savings in investment. However, the boom crashes when the banking authorities suspend their policy of credit expansion. Therefore, changes in total expenditure i. Then we shall also be able to determine whether this assumption has necessarily to be made in the usual form, or whether it only represents a special instance of a far more widely significant extension of the assumptions of elementary theory.
This view has been stated very forcibly by Professor A. The theories of Smith, Ricardo and Heckscher-Ohlin show why it is beneficial for a country to engage in international trade even for products it is able to produce for itselfInternational trade allows a country to specialize in the manufacture and export of products that can be produced most efficiently in that country, and import products that can be produced more efficiently in other countries The Benefits of Trade The Pattern of International Trade : International trade theory helps explain trade patternsSome patterns of trade are fairly easy to explain - it is obvious why Saudi Arabia exports oil, Ghana exports cocoa, and Brazil exports coffeeBut, why does Switzerland export chemicals, pharmaceuticals, watches, and jewelry? With the disappearance of the idea that money can only exert an active influence on economic movement when the value of money as measured by one kind of price level is changing, the theory that the general value of money is the sole object of explanation for monetary theory must fall to the ground. Consequently it never becomes clear why these phenomena must always occur as they are described; and there always remains a possibility that, on some other occasion, they may occur in a different way, or in a different order, without his being able to account for this difference on the basis of his exposition. In modern monetary theories of trade cycles this relation between money supply and rate of interest plays an important role in determining the level of economic activity. And the cycle will move on the path of prosperity. Only in this way is it possible to incorporate trade cycle theory into the static system that is the basis of all theoretical economics; and, for this very reason, the monetary elements must be regarded as decisive factors in the explanation of cyclical fluctuations.
His fundamental thesis is that when the money rate of interest coincides with the natural rate i. For instance, an extension of 10 percent, in one particular year, in the machinery of a factory that normally renews 10 percent of its machinery annually, causes an increase of 100 percent in the production of machinery — i. This seems to us purely utopian. Thus we cannot give a sufficient explanation for the occurrence of the disproportionality in these terms. And it is rightly assumed, as we shall see later on, that it is precisely the behavior of interest, the price of credit, which makes possible these disturbances in price formation. Forced savings increase with the fall in consumption which are invested for the production of capital goods.
It cannot be expected to confirm the theory in a positive sense. Lowe, who expressly fasten on this point in their criticism of monetary trade cycle theories, from looking from monetary influences to changes in the general value of money, while disregarding the changes in the distributive process which are conditioned by monetary causes. Second, at the same time the current costs of new capital goods rise due to shortages and bottlenecks of materials and labour. For the most part, however, no solution has been found to the wider problem of building up on the basis of the theory of an equilibrium rate of interest, which can be deduced from the creditless economy, the structure of different rates that can be simultaneously observed in a modern economy. According to Dernburg and McDougall, the full employment level depends on the magnitude of the resources that are available to the country. Free trade cannot possibly be in the interests of such nations! Similarly during boom, rate of interest should be low because of weak liquidity preference; but actually the rate of interest is high. Ceiling fails to explain adequately the onset of Depression: Hicks has been criticised for his explanation of the ceiling or the upper limit of the cycle.
Since consumption of durable consumer goods can be deferred, it also fluctuates greatly during the course of business cycles. For example, if 70 percent is always re-deposited instead of the full 90 percent, this amount being re-lent by every bank and the remainder being used in cash transactions, then the increase in deposits will give rise to additional credit equal to only 0. Demand for bank loans increases. On the contrary, there can be no doubt that trade cycle theory can only gain full practical importance through exact measurement of the actual course of the phenomena it describes. Once the prices begin to fall businessmen begin to expect that they will fall further. The differences in the effects of these two kinds of variation between consumption and capital formation manifest themselves first of all on the price system, and thus on the natural or equilibrium rate of interest. Business cycle is recurrent and rhythmic; prosperity is followed by depression and vice versa.