Kondratieff Cycle Notes

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3 Aug 2010
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Kondratieff Cycle:
- Long term business cycle t 50-60 years
- Periodic fluctuation in rate of economic activity
- Measured by levels of employment, prices, and production
- Prosperity, recession, depression, recovery
- Upswing vs. downturn (Van Dujin and Mensch)
Multiplier-Accelerator Mechanism
- Function of change in y (output)
- Investment increases Æ multiplier increases Æ spending changes
- Accelerator = K t Y ratio
o Greater than 1, high K-Y Ratio
o Consumption affecting investment
- Multiplier
o Expenditure; person receiving money spends it, continues
o investment spending translates to some degree to increased earnings for some in the economy
and also allows for increased government spending
o increase I = change in multiplier
o backward/forward investment linkage
- give rise to cyclical responses to initial shocks
- economic output depends on the level of the investment
o investment determines the level of aggregate output (multiplier), and is determined by
aggregate demand (accelerator)
- increase in government expenditure Æ increase in consumer incomes Æ (through the multiplier effect)
increase in output Æ(through the accelerator process) raises investment
- cyclical basis.
- Simulate consumption and investment
o Y = C + I
o I = B/3(Yt-1 t Yt-2); if Yt-1 > Yt-2, increase output
- multipier makes output rise following a rise in investment
- accelerator makes investment increase when output increases
Strong Accelerator: economy expansion
Weak Accelerator: expansion slows, decrease investment, decrease incomes Æslump follows (capital wears out)
Æeconomy expands again only when capital has fallen sufficiently relative to output that addition investment is
needed
William Lewis t GDP/Power Of Productivity
1) undistorted competition in the product market (productive = winner)
a. market distortions explain difference in GDP across countries
2) innovations = increased productivity, increased profits, increase investments, obtain market share
3) government influence restricts productivity growth
a. protections
b. tax
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