Economic models from the
History of Economic Thought

Recent posts

Kaldor's model of the trade cycle: dynamics and a numerical example

In 1940, Nicholas Kaldor published in the Economic Journal a famous article presenting a new model of the trade cycle.1 Its main mechanism relied on the discrepancies between ex-ante saving and investment to explain the changes in the level of activity, and it introduced two important variations to this idea: (i), saving and investments were themselves functions of the level of activity, and (ii) the stock of capital was slowly varying. This make of his model a medium-run model of economic fluctuations, where oscillations arise endogeneously because of the non-linear relations between the two curves of investment and savings.

  1. Kaldor, Nicholas. 1940. “A Model of the Trade Cycle.” The Economic Journal 50(197):78–92. doi: 10.2307/2225740. url: 

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ISLM and the Aggregate Demand curve

In a previous post we constructed the IS-LM model from a demand for goods, a demand for money, and two equilibrium conditions. By adding a very simple liquidity trap, this model was already able to tell us some things about the Keynes effect and the Fisher effect in different situations.

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The ISLM Model

We present a simple IS LM model with two markets: the goods market and the “money” market. The goods market is describe in a previous post We linearise the model so that we have a very simple solution, graphically straightforward.

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The Keynesian Cross and the IS curve

In this post, we build the IS curve from the equilibrium positions on the goods market. The curve is later used in several models (see this post and that one). The approach presented here is deliberately simplified, as a first step toward building the IS LM model and integrating different macroeconomic effects.

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