Prosperity and Depression.pdf

Recent Developments in Trade Cycle TheoryPart IIIvarious ways of doing it. Mr. HARROD proposes the following: 1 Whatgenerates income, he says, is not the excess of exports over imports butthe volume of exports, or more precisely that part of it that does notrepresent there-export, during the same period, of imported raw materials.Similarly, of the total investment outlay only that part should be takenwhich is sp~nt on wages and home produced materials and implements.The multiplicand-Mr. HARROD calls it the Hbase" of the multiplier calculation-thusbecomes (V - M v ) + (X - M:c), where M v stands forthe value of imports of investment goods and Mal for the value of importsof materials to- be embodied in exports. If Me denotes the valueof imports of consumption goods, M v+M:c + Me == M (total imports).The new multiplicand is greater by Me than the multiplicand offormula (I):Hence the multiplier must be made smaller in the same proportion.Professor ROBERTSON has shown, it becomes I ,if by q weI-C(I-q)denote the proportion of consumption expenditure spent on importedconsumption goods == Me. It follows that cq == Me. It is theCyproportion of income spent on imported consumption goods and maybe called the "(marginal) ,propensity to import consumption goods."Moreover, c-cq is the proportion of income spent on home producedconsumption goods and may be called the ct (marginal) propensity toconsume home produced goods." Mr. HARROD'S multiplier formula becomes:Y~(V-Mv+X-M$) I ..... (2)I - (c-cq)It is easy to see that this formula gives the same result as formula (1).2As Professor ROBERTSON says, the difference between the two is onlythat "whereas in (I) the q factor is implicit in the multiplicand, in (2)it is explicit in the multiplier." 31 The Trade Cycle, pages 149 and 153-4, and International Economics, revisededition, 1939, Chapters VI-VIII.2y = (1 + Me) C I Me =(1 + Me) y _ CY+Me ; since Y-C == 1,1--+yY[he left hand side of the equation reduces to Y.a Loc. cit., page 354.As