Macroeconomics and the Trade Cycle

  • Tönu Puu


In the following model we propose a simple change to the nonlinear Hicksian trade cycle model of 1950 through just internalizing capital stock. This brings no alien elements into the model, it just makes explicit what is there already, i.e., investment, considering that capital is the cumulative sum of successive investments. This makes it possible to tie the “floor” disinvestment to capital stock through its depreciation rate. The consequence is that one can dispense with the exogenous floor (constant, or growing) altogether. Through capital accumulation the model produces an endogenous growth trend, more explicitly, growth cycles around a trend. Thus also the Hicksian autonomous growth trend can be dispensed with, and the model becomes self contained. A problem then may seem to be that without these exogenous trends the growing variables, income and capital, cannot be reduced to stationarity through trend elimination. A new method, proposed by the author 55 years ago, which we call relative dynamics, replaces the growing income by the income growth factor and the growing capital by the capital to income ratio, and these appear as stationary time series, predominantly periodic The change removes arbitrary assumptions, such as equality of growth rates for the exogenous trends, in autonomous expenditures and the investment floor. This seems to be good as at second thought the floor level apparently must be decreasing rather than growing when capital accumulates. The change also produces both trend and cycles on its own, which the original multiplier-accelerator model cannot, and further reduces periodic growth rates from 50–100% in the original model to more realistic 0.2–10%.


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Authors and Affiliations

  • Tönu Puu
    • 1
  1. 1.Centre for Regional Science (CERUM)Umeå UniversityUmeåSweden

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