F105ECO Building Cycles

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Various Theories of Economic Cycles

Include Exogenous shock, Multiplier-accelerator, ceilings and floors, land hoarding

Models Barras model of the property cycle and BH & S clock

Building cycles follow the wider economy or the property sector is a significant driving force.

Multiplier accelerator theory is a combination of two theories

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Multiplier theory

an Increase in AD will lead to larger eventual changes in National Income (NI)

∆ NI- ∆spending - ∆production - ∆income - ∆Spending and so on

each round gets progressively smaller due to leaks eg savings imports taxation

the multipliers in built decelerator

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Accelerator theory (of Net Investment)

The causes of Net investment to change

Firms will want to keep up with the demand for their product and will want to ensure there is sufficient capital to do so  each firm will have a (DCOR)

DCOR Desired Capital output Ratio

Q Output flow

Kd Desired capital

Formula DCOR = Kd/Q

Capital Stock is Replacement investment (replace depreciated stock) or New Investment (over and above depreciated stock)= investment in terms of real investment

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Accelelerator Relationships

Upward output changes prompting capital investment

Kd=DCOR x Q

where there is a change in Q

Kd=DCOR x ∆Q =desired net investment Id

Where Q is accelerating upwards and ∆Q is rising resulting Id is rises

this increase in investment demand will have an effect on NI

the interaction of accelerator and multiplier will will induce a cumultive process of growth or decline in economic activity.

the in build deceleration process of the multiplier in rising spending will trigger a fall in investment which in turn causes a downward multiplier process

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