Trade Cycle

TRADE CYCLE: 

TRADE CYCLE

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Meaning : The term “ Trade cycle” in economics refers to the wave-like fluctuations in the aggregate economics activity, particularly in employment, output and income . In other words, trade cycles are ups and downs in economic activity. A trade cycle is defined in various ways by different economists. For instance, Mitchell defined trade cycle as “a fluctuation in aggregate economic activity”. According to Harerier, “The business cycle in the general sense may be defined as an alternation of periods of prosperity and depression, of good and bad trade.”

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Features of trade cycle A trade cycle is a wave-like movement . Cyclical fluctuations are recruitment in nature. Expansion and contraction in a trade cycle are cumulative in effect . Trade cycles are all-pervading in their impact. A trade cycle is characterized by the presence of crisis, i.e , the peak and the trough are not symmetrical, that is to say, the downward movement is more sudden and violent than the change from downward to upward. Though cycles differ in timing amplitude, they have a common pattern of phases which are sequential in nature.

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Keynes, points out that “ A trade cycle is composed of periods of good trade characterized by rising prices and low unemployment, altering with periods of bad trade characterized by falling prices and high unemployment.” Keynes, thus, stresses two indices namely, prices and unemployment, for measuring the upswing and downswing of the business cycles.

Phases of Business Cycles: 

The ups and downs in the economy are reflected by the fluctuations in aggregate economic magnitudes, such as, production, investment, employment, prices, wages, bank credits, etc. The upward and downward movements in these magnitudes show different phases of a business cycle. The various Phases of trade cycle may be enumerated as follows: Phases of Business Cycles

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DIAGRAM Y . . Boom Boom Level of Pros Rece Pros Rece Economic Normal Eco Activity Depre Recov - nomic Activity Trough O X Time (Years)

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1.Expansion : There is a high level of output and trade. There is high level of effective demand. There is a high level of employment and income. Wages, interest and profits are quite high. There is a large expansion of bank credit. Business failures are very few. There is heavy investment in durable capital goods industries. Thus, there is a feeling of optimism in the whole economy and business confidence is at its highest. The stage of full employment is very often the usual goal of the national economic policies of most of the countries.

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Peak or Boom: The prosperity phases gives way to the emergence of boom or inflation. Business optimism stimulate further investment. Rise in investment increases pressure on available workforce and materials. Hence wages and price rise. Number of jobs exceed the number of workers avaiable in the market. This situation is called overfull employment. Prices, wages, interest and profit move in the upward direction. Business people borrow more for investment. This adds fuel to the fire. The tempo of boom reaches new heights. There is an atmosphere of over optimism all around.

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Boom carries with it the seeds of self-destruction. Bottlenecks begin to appear in the economy. Labor, materials etc. become scarce. This leads to higher wages and prices and in turn upsets the cost calculation of manufacturers. They stop further expansion of existing units.

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Recession : There is a downfall in the activities of stock exchanges. Failure of some business creates panic among businessmen. No new ventures are taken up. Banks curtail credit. Business expansion stops. Workers are laid off. There is unemployment in the economy. Income, Expenditure, prices, profits, industrial and trade activities all fall.

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Thus, recession is a period of utter confusion and chaos. Once the recession starts in the economy, it gathers momentum till it reaches its final stage of business cycle, i.e , depression. Thus, in brief , recession is the intervening phase between the boom and depression.

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Depression or Trough: The general price level in the economy is very low. The volume of production and trade is falling. Level of unemployment is very high. Most of the firms are incurring losses. Interest, wages and rent are all falling. Aggregate expenditure and effective demand go on declining. Bank credit contracts. There is little or no opportunity to invest.

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Stock market is dull and prices of securities fall to a low level. Construction activity comes to a complete stand still. The consumer goods industries are least affected, while capital good industries come to a complete stand-still. While all sections in the economy suffer, some suffer more than others. Thus there is overall pessimism in the economy.

Causes of Business Cycles: 

Various causes that lead to business cycles are as: Expansion and contraction of Loans by Banks Change in the volume of Investment or Decrease in the Marginal Efficiency of Capital. Under consumption or Excessive Saving. Lack of Adjustment between Demand and Supply. Innovation Feeling of Entrepreneurs. Seasonal Fluctuations Other Factors Causes of Business Cycles

Measures to Control Business Cycles: 

Measures to Control Business Cycles