Trade Cycle The economic activity in a capitalist economy will have its periodic ups and downs. The study of these ups and downs is called the study of Business cycle or Trade cycle or Industrial Fluctuation. . .
Meaning of Trade Cycle A Trade cycle refers to oscillations in aggregate economic activity particularly in employment, output, income, etc. It is due to the inherent contraction and expansion of the elements which energize the economic activities of the nation. The fluctuations are periodical, differing in intensity and changing in its coverage. Definition “A trade cycle is composed of periods of good trade characterised by rising prices and low unemployment percentages altering with periods of bad trade characterised by falling prices and high unemployment percentages”.
- J.M. Keynes . . Phases of Trade Cycle The four different phases of trade cycle is referred to as (i) Boom (ii) Recession (iii) Depression and (iv) Recovery.
These are illustrated in the Figure . . Phases of Trade Cycle i) Boom or Prosperity Phase: The full employment and the movement of the economy beyond full employment is characterized as boom period. During this period, there is hectic activity in economy.
Money wages rise, profits increase and interest rates go up. The demand for bank credit increases and there is all-round optimism. ii) Recession: The turning point from boom condition is called recession. This happens at higher rate, than what was earlier.
Generally, the failure of a company or bank bursts the boom and brings a phase of recession. Investments are drastically reduced, production comes down and income and profits decline. There is panic in the stock market and business activities show signs of dullness. Liquidity preference of the people rises and money market becomes tight.
iii) Depression: During depression the level of economic activity becomes extremely low. Firms incur losses and closure of business becomes a common