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Samuelson Business Cycle

Preprint · May 2020

DOI: 10.13140/RG.2.2.18696.57608/1

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 Samuelson’s Theory of Business Cycle
(Multiplier-Accelerator Model)
Dr. Rajesh Pal
Professor and Head
Department of Economics
Mahatma Gandhi Kashi Vidyapith,Varanasi
Email: rajesh.pal6@[Link]

Abstract
We arrive at the process of income generation through the working together of multiplier and
accelerator principles. However, Paul Samuelson went further and stated that through the values
of multiplier and accelerator, it is possible to explain the path of fluctuations in the pattern of
income level and on that basis he defined five cases of business cycle. Paul Samuelson stated
that if we know autonomous consumption, autonomous investment, consumption for the current
period and preceding period, we can determine the growth path of income and output for any
period with the given values of marginal propensity to consume and capital-output ratio or
accelerator by substituting these values in the equation of income (Y). In this paper, the author
has examined the theory of business cycle by putting different values of marginal propensity to
consume and accelerator in equation and arrived income is plotted on the graph to see if business
cycle is formed in the same way as Paul Samuelson has stated. The figure of business cycle that
arrived from the combination of marginal propensity to consume and accelerator is somewhat
different from that of Samuelson’s business cycle.
Keywords: multiplier, accelerator, business cycle, income, autonomous investment.
JEL: E32.
Introduction:

John Maynard Keynes in his book “The General Theory of Employment, Interest, and Money
(1936)” argued that business cycles (Keynes used trade cycle for the term business cycles) are
the result of investment changes generated by cyclical changes in the marginal efficiency of
capital through complicated and often aggravated by associated changes in other significant short
period variables of the economic system. In his explanation of the business cycle, Keynes used
multiplier to explain cyclical fluctuation and changes in income and output. Keynes did not
explain the cyclical and cumulative nature of fluctuations in the economic activity. He did not

1
use accelerator for the explanation of the business cycles. It was P.A. Samuelson who in his
seminal paper “Interaction between the Multiplier Analysis and the Principle of Acceleration”
(1939) combined the newly arrived Keynesian multiplier analysis with the older principle of
acceleration. Through interaction of multiplier and acceleration principles, Samuelson developed
modern business cycle in 1939. The important point in the Samuelson model of business cycle is
enumerated below:

1. An autonomous increase in the level of autonomous investment raises income by a

magnified amount depending upon the value of the multiplier (k).
2. Increase in income increases induced investment, which is private investment which is
main cause of fluctuation in the economy.
3. Fluctuations in investment are the main cause of instability in a free private enterprise
economy.
4. Increase in income increases aggregate demand for goods and services, which depends on
multiplier.
5. Increase in aggregated demand for goods and services increases income demand for
capital goods, which is required to produce consumption goods. Demand for capital
goods is induced investment which depends on accelerator (i.e., capital-output ratio).
6. The interaction between the multiplier and accelerator without any external shocks can
give rise to the business cycles whose pattern differs depending upon the magnitudes of
the marginal propensity to consume and capital-output ratio.

Assumptions of the Samuelson’s Business Cycle Theory

Samuelson’s theory of business cycle is based on the following assumptions:

1. There is no excess capacity of production; i.e., production capacity is limited;

2. Combination of multiplier and accelerator causes economic fluctuation in the economy;
3. Consumption spending in the current period depends on the income of the preceding
year;
4. Investment in the current period depends on the change in income with a lag of one
period;
5. There is no foreign trade;

2
 6. There would be gap of one year between the increase in consumption and increase in
demand for investment;
7. The exogenous spending, i.e., government spending is constant and no attempt is made to
use government spending as an instrument for controlling the time path of income;
8. Marginal propensity to consume (c) is greater than zero but less than one. This may be
written as 0 < c < 1 and accelerator is greater than 1;
9. This model neither considers the determinants of the government spending nor the effects
of its changes in the level of income and output.

Explanation of the Business Cycle Theory of Samuelson

According to Samuelson, multiplier alone cannot adequately explain the cyclical and cumulative
nature of the economic fluctuations. Samuelson believes that cyclical fluctuations in economic
activity are the result of the interaction of multiplier and accelerator. The basic tenet of the
Samuelson model is that an autonomous increase in the level of investment raises income by a
magnified amount depending upon the value of the multiplier (k). The multiplier (k) in the closed
economy is written as

ℎ 1
= = =
ℎ ( )
1
=
1− ( )

This increase in income due to autonomous investment (Ia) further induces the increases in
investment through the acceleration effect – known as induced investment. The acceleration (a)
is also called the capital output ratio and it is reverse of the multiplier. The increase in income
brings about increase in aggregate demand for goods and services. To meet the increased
aggregate demand for goods and services, the economy would require more capital goods for
which extra investment is undertaken. This is induced investment, which comes through income,
which is generated through autonomous investment. Thus, the relationship between investment
and income is one of mutual interaction. Investment affects income which in turn affects
investment demand and in this process income and employment fluctuate in a cyclical manner.

3
Samuelson model shows how income and output will increase by even larger amount when
Keynesian multiplier is combined with the accelerator. This is shown in the Figure 1.

1. Increase in
Autonomous
Investment, (∆Ia)

Income, Ouput
and employment 2. Increase in
increases by Income through
larger amount Multiplier (K),
with the
combination of ∆Y = ∆Ia (1/1-
multiplier and MPC)
accelerator

Increase in
Induced
Investment
(∆Ii)though
accelerator (v),
∆Ii = v (∆Y)

Figure 1: Interaction of Multiplier

and Accelerator

4
The model of interaction between multiplier and accelerator can mathematically be represented
as under:
Yt = Ct + It i
Ct = Ca + c (Yt-1) ii

It = Ia + a (Yt-1– Yt-2) iii

Yt = Ca + c (Yt-1) + Ia + a (Yt-1 – Yt-2) iv

where Yt, Ct, and It stand for income, consumption and investment respectively for a current
period t, Ca stands for autonomous consumption, Ia for autonomous investment, c for marginal
propensity to consume and a for the capital-output ratio or accelerator. It must be noted here that
government activity is not taken because Samuelson model neither considers the determinants of
the government spending nor the effects of its changes in the level of income and output.
From the above equation it is evident that:
1. Equation i shows that income in current period (Yt) is the summation of Consumption in
a current period (Ct) and investment in current period (It).
2. Equation ii shows that consumption in current period (Ct) is the summation of
autonomous consumption (Ca) and function of previous year’s income multiplied by
marginal propensity to consume {c (Yt - 1)}. This equation can also be written as Ct = c
(Yt - 1). This shows that consumption in current period is a function of previous year’s
income. That is one period lag has been assumed for income to determine the
consumption of a current period. Equation ii shows that consumption is a linear function
of the previous year, where marginal propensity to consume (c) is greater than zero but
less than one, i.e., 0 < c < 1.

3. Equation iii shows that induced investment in current period (It) is a summation of
autonomous investment (Ia) and function of a change in income of the two previous years
(i.e., Yt-1 – Yt-2) multiplied by accelerator or capital- Output ratio, shown by a. Thus,
induced investment is a product of change in income and accelerator, which is shown by
{a(Yt-1– Yt-2)}. Thus, equation (iii) can also be written as It = a(∆Yt-1). This shows that
induced investment in current period is function of change in income in the previous
period. That is there is two periods gap for changes in income in the previous period to
determine induced investment of current period. Equation iii indicates that investment is

5
 proportional to the change in the level of income/consumption between the previous and
current period. In this equation iii a is accelerator or capital-output ratio, which is shown
!"#$%&'$"&
as, ( ) = !"()'$/+)"%,'-&.)". Accelerator is assumed to be greater than

zero, i.e., a > 0. It is assumed to be positive. Equation iii can also be written as,
It = Ia + a (Ct – Ct-1) iii
It = Ia + a (Yt-1 – Yt-2 ) since, Ct-1 = c (Yt-2). iii
Substituting equations (ii) and (iii) in equation (i) we get the equation iv, which is
Yt = Ca + c (Yt-1) + Ia + a (Yt-1 – Yt-2) iv
This equation shows that aggregate income or output in current period (Yt) is the
summation of autonomous consumption (Ca) plus additional consumption depends on the
marginal propensity to consume (c) times income of the previous year and autonomous
investment (Ia) plus additional amount of investment that depends on the capital-output ratio or
accelerator (a) times the change in income of the previous year (Yt-1 – Yt-2). The equation shows
that changes in income depend on the values of marginal propensity to consume (c) and capital-
output ratio or accelerator (a). Samuelson model states that if we know the value of marginal
propensity to consume (c), capital-output ratio, which is also called accelerator (a), income of the
current period (Yt) and income of the previous period (Yt-1) then the present and future income
can be determined by putting the given values in the equation. It must be known here that, the
level of income determined in the above equations show dynamic equilibrium. In static
equilibrium, the level of income determined will be
Y = Ca + c(Y) + I v
In static equilibrium, changes do not take place, equilibrium level of income remains
unchanged, that is, in this case, Yt = Yt-1 = Yt-2 = Yt-n so that period lags have no influence at all
and accelerator is reduced to zero. Thus, in a dynamic state when autonomous investment
changes, the equation (iv) describes the path which a disequilibrium system follows to reach
either a final equilibrium state or moves away from it. The movement of economy towards a new
equilibrium or deviates away from it depends on the values of marginal propensity to consume
(c) and capital-output ratio or accelerator (a).
Samuelson has described five different paths of business cycle with the different
combination of given value of marginal propensity to consume (c) and capital- output ratio or
accelerator (a) which is given in Table 1. The various combinations of the values of marginal

6
propensity to consume and capital-output
capital output ratio (which respectively determine the magnitudes of
multiplier and accelerator) are shown in Table 1.
Table 1: Five Different Path of Cycle with the Given Value of Marginal Propensity to
Consume (c) and Capital-Output
Capital Ratio or Accelerator
ccelerator (a)
Region Marginal Multiplier Accelerator Different Paths of Types of Oscillation
Propensity (k) (a) Trade/Business
to Consume k = / cycle
/0 (
(c)
A 0.5 2 0 Smooth No Oscillation/Stable
Convergence
B 0.5 2 1 Damped Cycle Stable Oscillation
E 0.5 2 2 Constant Cycle Constant Oscillation
(special case)
C 0.5 2 3 Anti-Damped Unstable Oscillation
/Explosive
Cycle/Explosive
Cycle
D 0.5 2 4 Smooth Unstable
Expansion No Oscillation
(Explosive
Growth)

7
Samuelson in his paper explained that movements in the economic activities depend on the
values of marginal propensity to consume (c) and accelerator (a). With these given values, and
given change in autonomous spending, he explained four cases of different dynamic income
paths or five cases of dynamic income path if we include a special case, which is shown in
Figure 2. Figure 2 shows five region of movement of income, viz., Region A, B, C, D, and E.
Region A shows that when value of multiplier is 2 and accelerator is zero, with a change in
autonomous investment or consumption, income or gross national product may move upward or
downward with decreasing rate and reaches its new equilibrium point and become parallel to
new equilibrium point as depicted in panel A of Figure 3. There is no oscillation in region A for
new equilibrium is parallel to the initial equilibrium, and thus there in no cycle as shown in panel
A of Figure 3.
With the change in autonomous consumption or investment, when values of accelerator
increases to 1 and values of multiplier remain as before it generates fluctuation in the income and
pattern of development in the income forms the shape of Region B as it is depicted in the Figure
2. With change in autonomous consumption or investment, values of multiplier and accelerator
in region B generates fluctuations in income and follow the pattern of series of a damped cycles
whose amplitudes go on declining until the cycle disappear as depicted in panel B of Figure 3.
In panel B of Figure 3, fluctuation in income generates stable oscillation as it disappeared on
reaching the new equilibrium point.
In the region C of Figure 2 value of accelerator is greater than multiplier, consequently
combination of marginal propensity to consume/ multiplier and accelerator or capital-output ratio
generates fluctuation in income with successively greater and greater amplitude. This type of
fluctuation in income is explosive in nature and with the passage of time its oscillation becomes
unstable as multiplier become larger and larger. This is called anti-damped cycle or explosive
cycle depicted in panel C of Figure 3. This explosive cycle must be restrained by ceiling and
floor in case of expansion and contraction of business cycle respectively.
The values of multiplier or marginal propensity to consume (c) and accelerator (a) in the
region D of Figure 2 generate high fluctuation in the income with successively greater and
greater amplitude that cause the economic system to explode and diverge from the equilibrium
state by an increasing amount. The value of multiplier and accelerator in this region may cause
income to move upward or downward at an increasing rate. This depicts smooth expansion in the

8
income with greater amplitude, which must be restrained by the factors determining ceiling and
floor if the cyclical movements are to occur in the system. This is depicted in panel D of Figure
3.
There is a special case of business cycle, which is shown by point E which lies between the
boundary area of B and C. To understand this you just draw a parallel curve to the curve marked
by E. The value of multiplier and accelerator lies in area E generates fluctuation in income of
constant amplitude as depicted in panel E of Figure 3.
It is worth noting here that all combinations of values of marginal propensity to consume (c)
and accelerator (a) do not produce business cycle or cyclical fluctuation in the economy. Those
combinations of c and a lying in regions B, C, and E produce business cycle. In the region A
and D of Figure 2, there is no business cycle because the combination of multiplier and
accelerator in the region A are such that with changes in autonomous investment or autonomous
consumption, income moves smoothly from initial equilibrium to new equilibrium without
producing any cyclical fluctuations or oscillations (see panel A of Figure 3) in the economic
activity measured in the terms of national income or gross national product. Similarly, the
values of multiplier and accelerator in the region D are such that with changes in autonomous
investment or autonomous consumption, income moves explosively in upward direction without
producing any oscillation in the economic system. There is smooth expansion in income of
region D, thus there is no cyclical fluctuation in region D.
The value of multiplier and accelerator in region B with changes in autonomous
investment/consumption produces damped cycle. The oscillation produces in the region B are
called damped cycles because this fluctuation tends to disappear over time or die out over
period of time. This indicates that amplitude of cycle shrinks to zero and formation of cycle dies
out. Generally, business cycle observed in the post-war period was relatively damped cycles as
compare to that of inter-war period. However, there is no historical evidence to support the view
that the business cycles will completely die out or disappear over period of time. This may
happen only when one time investment takes place in the economy. In other words, business
cycle in the region B explains the impact of one time autonomous investment. The effect of one
time autonomous investment in the economy goes on decline over period of time should no
other disturbance take place in the economy. However, advancement in technology, innovation,
natural disaster, and man-made disaster such as security scam in India in 1991-92 do take place

9
in the economy quite frequently and at random intervals. Thus, the values of multiplier and
accelerator withh such disturbances that takes place on and off in the economy tends to produce
irregular business cycle which does not die out or disappear over period of time as mentioned in
the region B of Figure 2.

The cycle generated by the value of multiplier an

andd accelerator in the region C is of no doubt
continued oscillation but this oscillation/cycle is explosive in nature, which is not in consistent
with the real word situation where cycle does not become explosive. The explosive cycle of
10
region C can be made consistent with the real world situation by the government. By imposing
ceiling or upper limit and floor or lower limit on the expansion and contraction of income and
output respectively government may make explosive cycle in consistent with the real world
situation
The region E produces such an oscillation or cycle which neither disappears nor explodes
over period of time but goes on with constant amplitude, which does not fit in the real world,
where business cycles differ a good deal in amplitude and duration.
Examination of Samuelson’s Business Cycle
In Figure 2 and Figure 3, we have seen Samuelson’s five cases of business cycle with the values
of marginal propensity to consume, accelerator and autonomous investment. In this section, we
observe some different business cycle after plotting the value of marginal propensity to consume,
accelerator, and autonomous investment. The different income level is shown in Table 2. For
calculation of income level see appendix. When we plot Figure 2 on the basis of Table 2, we get
totally different figure, which is depicted in the Figure 4. Similarly, when we plot Figure 3, we
get something different figure, which is depicted in Figure 5.
Table 2: Income/Output with the constant value of Marginal Propensity to Consume (c)
and varying Capital-output Ratio or Accelerator (a)
Period Income of Income of Income of Income of Income of
Region A Region B Region E Region C Region D
c = 0.5; a = 0 c = 0.5; a = 1 c = 0.5; a = 2 c = 0.5; a = 3 c = 0.5; a = 4

1 1 1 1 1 1
2 1.5 2 2.5 3.0 3.5
3 1.75 2.5 3.75 4.5 7.75
4 1.875 2.50 4.125 4.75 13.375
5 1.9375 2.25 3.4375 3.625 18.9375
6 1.9688 2.00 2.0314 1.6875 21.5938
7 1.9844 0.075 0.6095 -0.0939 17.1093
8 1.9922 0.975 -0.1171 -0.8282 0.5859
9 1.9961 1.5325 0.2147 -11.329 -31.754
10 1.9981 2.045 0.7755 -7.7115 -79.557

11
 Note: Autonomous investment/ income of the period 1 is given as Rs.1.

40

20

0
0 2 4 6 8 10 12
-20
Income of Region A, c = 0.5; a = 0
Income of Region B, c = 0.5; a = 1
-40 Income of Region E, c = 0.5; a = 2
Income of Region C, c = 0.5; a = 3
-60 Income of Region D, c = 0.5; a = 4

-80

-100

Figure 4: Business Cycle with the given value of marginal propensity to consume (c)
and accelerator (a)

In Figure 5, business cycle shown in region A is similar to the business cycle of Samuelson
shown in panel A of Figure 3. According to Samuelson region B of Figure 2 will form damped
cycle that is the amplitude of fluctuation in income will shrink to zero as it is shown in the panel
B of Figure 3. However, the damped cycle shown in region B is not damped as depicted by
Samuelson as shown in panel B of Figure 3. Though, amplitude of fluctuation shrinks to zero but
it starts moving from there in upward direction, thus, it cannot be named as damped cycle
because the cycle does not disappear or die out after reaching to point zero as shown in region B
of Figure 5.
Business cycle in Region E of Figure 5 matched with the business cycle of Samuelson as
shown in panel E of Figure 3. The business cycle in both figures moves with constant amplitude.
According to Samuelson business cycle in region C as shown in Figure 2 is explosive in nature.
The oscillation in the region C is unstable and explosive and, thus, it requires ceiling in upward
movement of business cycle as shown in panel C of Figure 3. However, when we plot the value
of marginal propensity to consume and accelerator on the graph though we get explosive

12
business cycle but it does not require ceiling as recommended by Samuelson because explosive
business cycle declines over period of time as depicted in region C of Figure 5.
Region D shows smooth expansion in the level of income without any oscillation. Like
region C, business cycle in region D is also explosive in nature and requires ceiling by the
government. However, the cycle shown in region D of Figure 5 does not support the business
cycle shown in panel D of Figure 3 because business cycle in region D of Figure 5 reflects
smooth expansion but does not requires ceiling as suggested by Samuelson.
The business cycle of region A and region E of Figure 5 fully support business cycle
theory of the Samuelson. However, region B, C, and D of Figure 5 partially matched with the
business cycle of Samuelson.

Region A: Cycless Path

Region B: Damped Cycle
c = 0.5; a = 0
c = 0.5; a = 1
3
2 4
1 2
0 0
0 5 10 15 0 5 10 15

Region E: Constant Cycle Region C: Anti-Damped

5 c = 0.5; a = 2 Cycle
c = 0.5; a = 3
0 20
0 5 10 15 0
-5
0 5 10 15
-20

Region D: Smooth Expansion

c = 0.5; a = 4
50

0
0 2 4 6 8 10 12
-50

-100
Figure 5:Pattern of Income Level with the given value of c and a

13
 Table 3: Income/Output with the varying value of Marginal Propensity to Consume (c)
and Capital-output Ratio or Accelerator (a)
Period Income Income Income Income
c = 0.5; a = 0 c = 0.5; a = 02 c = 0.6; a = 02 c = 0.8; a = 04

1 1
1 1 1
2 1.5
2.5 2.8 5
3 1.75
3.75 4.84 17.8
4 1.875
4.125 6.352 56.2
5 1.9375
3.4375 6.6256 169.84
6 1.9688
2.0313 5.3037 500.52
7 1.9844
0.9141 2.5959 1459.592
8 1.9922
0.1172 -0.6918 4227.704
9 1.9961
0.2148 -3.3603 12241.12
Source:[Link]
model-of-business-cycle-with-diagrams/10437.
Based on varying value of marginal propensity to consume and accelerator given in Table 3, we
will get the business cycles as shown in Figure 6, which are more in consistent with the
Samuelson model of business cycle explained in the Figure 3.
When marginal propensity to consume is 0.5 and accelerator is zero, income level will
approach the peak. Since coefficient of accelerator is zero, this will be the case of multiplier
effect only where income reaches asymptotic level as depicted in Figure 6.
When marginal propensity to consume is 0.5 and accelerator is 02, a regular cycle or
continuous cycle with constant amplitude, i.e., the value of multiplier level is more or less
unchanged repeating themselves indefinitely is arrived as depicted in Figure 6.

14
 An explosive cycle is arrived with the value of marginal propensity to consume 0.6 and
accelerator 02 as depicted in Figure 6. In this case variations in multiplier level becoming large
and large over period of time, which result in explosive cycle.
The combination of marginal propensity to consume 0.8 and accelerator 04 will result in
smooth expansion in income, where income gradually approaching a compound interest rate of
growth as depicted in Figure 6.
6

Multiplier-Accelerator
Accelerator Interaction
Paul Samuelson theory of business cycle is also known as multiplier-accelerator
multiplier model of
business cycle.. Though many economists have tried to explain economic phenomenon including
business cycle through multiplier
multiplier-accelerator
accelerator principles, Samuelson was pioneer among them.
Samuelson business cycle through multiplier-accelerator
multiplier accelerator principles can be understood with the
help of Table 4. In the formulation of Table 4, we have assumed that marginal propensity to
consume (c) being equal to 0.5, and capital
capital-output
output ratio or accelerator (a) being equal to 2. As we
know that Samuelson model of business cycle is based on the assumption of one period time
time-lag,
which implies that an increase in income in one period (t) induces increase
increase in consumption in
next time period (t+1). Initially it is assumed that in period t autonomous investment is Rs. 100.
This autonomous investment will remain constant at Rs. 100 crores throughout the period. With
this autonomous investment of Rs. 100 cores in period t,
t, consumption in period t+1 will be

15
increased by the value of marginal propensity to consume (c) which is 0.5. Thus, induced
consumption in period t+1 = c (Yt-1) = 0.5 (100) = Rs.50 as shown in column 2. Induced
investment is the multiplication of accelerator with the previous consumption. Thus, induced
investment in period t+1 = a (Ct - Ct-1) = 2 (50) = Rs. 100 as shown in column 2. Total income
equals Rs. 250, which is the summation of autonomous investment, induced consumption, and
induced investment. Similarly, in period t+2, induced consumption = c (Yt-1) = 0.5 (250) = 125.
Induced investment in period t+2 = a (Ct - Ct-1) = 2 (75) = Rs.150. Previous year’s consumption
of t+2 is the difference between t+1 and t, i.e., 125 – 50 = 75. Similarly, total income for rest of
the period will be calculated on the basis of equation. When total income of Table 4 is plotted on
graph, business cycle will look like as shown in Figure 7.
Table 4: Multiplier-Accelerator Interaction Model
Rs. in Crore
Period Initial/Autonomous Induced Consumption Induced Investment Total Income
(t) Investment C = c(Yt-1) I = a (Ct - Ct-1) (Y)
(1) (2) c = 0.5 a=2 (5)
(3) (4)
t 100 0 0 100
t+1 100 50 100 250
t+2 100 125 150 375
t+3 100 187.5 125 412.5
t+4 100 206.2 37.4 343.6
t+5 100 171.8 -68.8 203
t+6 100 101.5 -140.6 60.9
t+7 100 30.4 -142.2 11.8
t+8 100 -5.9 -72.6 21.9
t+9 100 10.7 33.2 143.9

16
Limitation of Samuelson’s Business Cycle
Samuelson model of business cycle is based on the assumption that interaction of multiplier and
accelerator generates fluctuations in the pattern of income level and on that basis he defined five
cases of business cycle. The values of multiplier and accelerator in the region C and D are such
that give rise to directly explosive upward or downward movement with oscillation in region C
and without oscillation in the region D,
D i.e., there is no business cycle in the region D because of
smooth expansion in the pattern of income level. The movements in the pattern of income level
are restrained by ceiling in case of upward movements and by floor in case of downward
movements. However, Samuelson’s
Samuelson business cycle theory fails to explain why the movements in
the pattern of income level starts moving in the reverse direction after reaching ceiling point.
Hicks’ theory of business cycle explained the reasons for the movements in the pattern of income
level in the reverse
se direction after reaching peak point/ceiling point.
The interaction of multiplier and accelerator principles no doubt plays an important role
in the explanation of cyclical fluctuation in the pattern of income level. However, it does not go
to raise the
he national income to higher and higher level because there are many practical
difficulties in the calculation of total effects of interaction of multiplier and accelerator principles
on the pattern of income level.
This model considers exogenous spending,, i.e., government spending as constant and no
attempt has been made to use government spending as an instrument for controlling the time path
of income. In other words this model neither considers the determinants of the government

17
spending nor the effects of its changes in the level of income and output. Thus, this model is
based on the structure of time-lag and coefficients of multiplier and accelerator which relate the
variables in the equations.

Conclusion
We arrive at the process of income generation through the working together of multiplier and
accelerator principles. However, Paul Samuelson went further and stated that through the values
of multiplier and accelerator, it is possible to explain the path of fluctuations in the pattern of
income level and on that basis he defined five cases of business cycle. Paul Samuelson stated
that if we know autonomous consumption, autonomous investment, consumption for the current
period and preceding period, we can determine the growth path of income and output for any
period with the given values of marginal propensity to consume and capital-output ratio or
accelerator by substituting these values in the equation of income (Y).
Appendix
Table 2: Explanation of Table 1
Income of Region A Income of Region B
When c = 0.5 and a = 0 When c = 0.5 and a = 1

Period 2 Period 2
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (1) + 0 = 0.5 Yt = 0.5 (1) + 1(0.5) = 1.0
Yt = 1 + 0.5 = 1.5 Yt = 1 + 1.0 = 2.0

Period 3 Period 3
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (1.5) + 0 = 0.75 Yt = 0.5 (2) + 1(0.5)
Yt = 1 + 0.75 = 1.75 Yt = 1.0 + 0.5 = 1.5
Yt = 1 + 1.5 = 2.5
Note: Ct – Ct-1 = 1.0 - 0.5 = 0.5

Period 4 Period 4

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 Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (1.75) + 0 = 0.875 Yt = 0.5 (2.5) + 1(0.25)
Yt = 1 + 0.875 = 1.875 Yt = 1.25 + 0.25 = 1.50
Yt = 1 + 1.50 = 2.50
Note: Ct – Ct-1 = 1.25 – 1.0 = 0.25

Period 5 Period 5
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (1.875) + 0 = 0.9375 Yt = 0.5 (2.5) + 1(0)
Yt = 1 + 0.9375 = 1.9375 Yt = 1.25 + 0 = 1.25
Yt = 1 + 1.25 = 2.25
Note: Ct – Ct-1 = 1.25 – 1.25 = 0

Period 6 Period 6
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (1.9375) + 0 = 0.96875 Yt = 0.5 (2.25) + 1(- 0.125)
Yt = 1 + 0.96875 = 1.96875 Yt = 1.125 – 0.125 = 1.00
Yt = 1 + 1.00 = 2.00
Note: Ct – Ct-1 = 1.125 – 1.25 = - 0.125

Period 7 Period 7
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (1. 96875) + 0 = 0.984375 Yt = 0.5 (2.00) + 1(-1.025)
Yt = 1 + 0.984375 = 1.984375 = 1.9844 Yt = 0.1 – 1.025 = -0.925
Yt = 1 + (-0.925) = 0.075
Note: Ct – Ct-1 = 0.1 – 1.125 = -1.025
Period 8 Period 8
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (1.9844) + 0 = 0.9922 Yt = 0.5 (0.075) + 1(-0.0625)
Yt = 1 + 0.9922 = 1.9922 Yt = 0.0375 – 0.0625 = -0.025
Yt = 1 + (-0.025) = 0.975

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 Note: Ct – Ct-1 = 0.0375 – 0.1= -0.0625
Period 9 Period 9
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (1.9922) + 0 = 0.9961 Yt = 0.5 (0.975) + 1(0.45)
Yt = 1 + 0.9961 = 1.9961 Yt = 0.4875 + 0.045 = 0.5325
Yt = 1 + 0.5325 = 1.5325
Note: Ct – Ct-1 = 0.4875 – 0.0375 = 0.45
Period 10 Period 10
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (1.9961) + 0 = 0.9981 Yt = 0.5 (1.5325) + 1(0.27875)
Yt = 1 + 0.9981 = 1.9981 Yt = 0.76625 + 0.27875= 1.045
Yt = 1 + 1.045 = 2.045
Note: Ct – Ct-1 = 0.76625 – 0.4875 = 0.27875
Income of Region E Income of Region C
When c = 0.5 and a = 2 When c = 0.5 and a = 3

Period 2 Period 2
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (1) + 2(0.5) Yt = 0.5 (1) + 3(0.5)
Yt = 0.5 + 1.0 = 1.5 Yt = 0.5 + 1.5 = 2.0
Yt = 1 + 1.5 = 2.5 Yt = 1 + 2.0 = 3.0
Period 3 Period 3
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (2.5) + 2(0.75) Yt = 0.5 (3) + 2(1.0)
Yt = 1.25 + 1.50 = 2.75 Yt = 1.5 + 2.0 = 3.5
Yt = 1 + 2.75 = 3.75 Yt = 1 + 3.5 = 4.5
Note: Ct – Ct-1 = 1.25 – 0.5 = 0.75 Note: Ct – Ct-1 = 1.5 – 0.5 = 1.0
Period 4 Period 4
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (3.75) + 2(0.625) Yt = 0.5 (4.5) + 2(0.75)
Yt = 1.875 + 1.250 = 3.125 Yt = 2.25 + 1.50 = 3.75

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 Yt = 1 + 3.125 = 4.125 Yt = 1 + 3.75 = 4.75
Note: Ct – Ct-1 = 1.875 – 1.25 = 0.625 Note: Ct – Ct-1 = 2.25 – 1.5 = 0.75
Period 5 Period 5
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (4.125) + 2(0.1875) Yt = 0.5 (4.75) + 2(0.125)
Yt = 2.0625 + 0.375 = 2.4375 Yt = 2.375 + 0.250 = 2.625
Yt = 1 + 2.4375 = 3.4375 Yt = 1 + 2.625 = 3.625
Note: Ct – Ct-1 = 2.0625 – 1.875 = 0.1875 Note: Ct – Ct-1 = 2.375 – 2.25 = 0.125
Period 6 Period 6
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (3.4375) + 2(-0.3437) Yt = 0.5 (3.625) + 2(-0.5625)
Yt = 1.7188 - 0.6874 = 1.0314 Yt = 1.8125 - 1.125 = 0.6875
Yt = 1 + 1.0314 = 2.0314 Yt = 1 + 0.6875 = 1.6875
Note: Ct – Ct-1 = 1.7188 – 2.0625 = - Note: Ct – Ct-1 = 1.8125 – 2.375 =
0.3437 -0.5625
Period 7 Period 7
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (2.0314) + 2(-0.7031) Yt = 0.5 (1.6875) + 2(-0.9688)
Yt = 1.0157 – 1.4062 = -0.3905 Yt = 0.8436 – 1.9375 = -1.0939
Yt = 1 + (-0.3905) = 0.6095 Yt = 1 + (-1.0939) = -0.0939
Note: Ct – Ct-1 = 1.0157 – 1.7188 = - Note: Ct – Ct-1 = 0.8436 – 1.8125 =
0.7031 -0.9688
Period 8 Period 8
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (0.6095) + 2(-0.7110) Yt = 0.5 (-0.0939) + 2(-0.8906)
Yt = 0.3048 – 1.4219 = -1.1171 Yt = -0.0470 – 1.7812 = -1.8282
Yt = 1 + (-1.1171) = -0.1171 Yt = 1 + (-1.8282) = -0.8282
Note: Ct – Ct-1 = 0.3048 – 1.0157 = - Note: Ct – Ct-1 = -0.0470 – 0.8436 =
0.7110 -0.8906
Period 9 Period 9
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)

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 Yt = 0.5 (-0.1171) + 2(-0.3634) Yt = 0.5 (-0.8282) + 2(-4.094)
Yt = -0.0586 – 0.7267 = -0.7853 Yt = -4.141 – 8.188 = -12.329
Yt = 1 + (-0.7853) = 0.2147 Yt = 1 + (-12.329) = -11.329
Note: Ct – Ct-1 = -0.0586 – 0.3048 = - Note: Ct – Ct-1 = -4.141 – (-0.0470) =
0.3634 -4.094
Period 10 Period 10
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (0.2147) + 2(0.1660) Yt = 0.5 (-11.329) + 2(-1.5235)
Yt = 0.1074 – 0.3319 = -0.2245 Yt = -5.6645 – 3.047 = -8.7115
Yt = 1 + (-0.2245) = 0.7755 Yt = 1 + (-8.7115) = -7.7115
Note: Ct – Ct-1 = 0.1074 – (-0.0586) = Note: Ct – Ct-1 = -5.6645 – (-4.141) =
0.1660 -1.5235
Region D, when c = 0.5 and, a = 4
Period 2 Period 3
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (1) + 4(0.5) Yt = 0.5 (3.5) + 4(1.25)
Yt = 0.5 + 2.0 = 2.5 Yt = 1.75 + 5.00 = 6.75
Yt = 1 + 2.5 = 3.5 Yt = 1 + 6.75 = 7.75
Note: Ct – Ct-1 = 1.75 – 0.5 = 1.25

Period 4 Period 5
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (7.75) + 4(2.125) Yt = 0.5 (13.375) + 4(2.8125)
Yt = 3.875 + 8.500 = 12.375 Yt = 6.6875 + 11.25 = 17.9375
Yt = 1 + 12.375 = 13.375 Yt = 1 + 17.9375 = 18.9375
Note: Ct – Ct-1 = 3.875 – 1.75 = 2.125 Note: Ct – Ct-1 = 6.6875 – 3.875 = 2.8125

Period 6 Period 7
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (18.9375) + 4(2.7813) Yt = 0.5 (21.5938) + 4(1.3281)
Yt = 9.4688 + 11.125 = 20.5938 Yt = 10.7969 + 5,3124 = 16.1093

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 Yt = 1 + 20.5938 = 21.5938 Yt = 1 + 16.1093 = 17.1093
Note: Ct – Ct-1 = 9.4688 – 6.6875 = Note: Ct – Ct-1 = 10.7969 – 9.4688 = 1.3281
2.7813

Period 8 Period 9
Yt = c(Yt-1) + a(Ct – Ct-1) Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (17.1093) + 4(-2.2422) Yt = 0.5 (0.5859) + 4(-8.2618)
Yt = 8.5547 + (-8.9688) = -0.4141 Yt = 0.2930 – 33.047 = -32.754
Yt = 1 + (-0.4141) = 0.5859 Yt = 1 + (-32.754) = -31.754
Note: Ct – Ct-1 = 8.5547 – 10.7969 = - Note: Ct – Ct-1 = 0.2930 – 8.5547 =
2.2422 -8.2618

Period 10
Yt = c(Yt-1) + a(Ct – Ct-1)
Yt = 0.5 (-31.754) + 4(-16.17)
Yt = -15.877 – 64.68 = -80.557
Yt = 1 + (-80.557 ) = -79.557
Note: Ct – Ct-1 = -15.877 – 0.2930 = -16.17

References
1. [Link]
model/samuelsons-model-of-business-cycle-with-diagrams/10437 acessed on 25-
04-2020.
2. [Link]
[Link] acessed on 25-04-2020.

3. Allen, RGD (1959). Trade Cycle Theory: Samuelson-Hicks. In Mathematical

Economics. Palgrave Macmillan. London.
4. [Link]
&tbm accessed on 26 the April 2020.

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 5. [Link]
business-cycles-with-criticisms-theories-macroeconomics/26598. accessed on 26
the April 2020.
6. Unit 14 Business Cycle Theory. Introduction to Economic Theory II.
[Link]
ics%20Eng/Block%203/Unit%2014%20Business%20Cycles%[Link]

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