Trade Cycle:
The business activities always keep on changing sometimes there is a period of good trade and some times bad. A period of good trade is followed by a period of bad business conditions. These ups and downs don’t remain same for ever. This wave like fluctuation in the business activities is known as business or trade cycle.
Definitions:
According to Hansen:
“Business cycle is a fluctuation in employment out put and prices”.
According to Keynes:
“A trade cycle is composed of period of good trade characterized by rising prices and low unemployment percentage alternating with periods of bad trade characterized by falling prices and high unemployment percentage”
Phases of Trade Cycle:
1. Boom or Prosperity
2. Recession
3. Depression or Slump
4. Recovery
1. Boom or Prosperity:
It is a state of overall happiness. It is the best economic situation with rapid increase in overall business activities.
Characteristics
Following are the characteristics of this phase:
A) Increase in investment:
In this stage the investors are investing all of their resources as it is a time period of prosperity and there are chances to earn maximum profit.
B) Increase in prices:
During this stage overall price level increases & as a result the profit of businessmen increases.
C) Increase in production:
Due to increase in investment production level increases rapidly during this stage.
D) Increase in employment:
Due to increase in investment & increase in production there are more opportunities for people to get employed. Due to this factor overall employment level increases.
E) Increase in income:
During this stage the income level of people increases. People have high purchasing power which results in more demand for goods.
2. Recession:
This phase starts after the phase of boom. During this stage the business activities starts declining i-e. slow down of business activities.
Characteristics:
Following are the characteristics of this phase:
A) Decreasing prices:
During this stage the general price level starts to decline as a result the profit of businessmen also decreases.
B) Decreasing investment:
As a result of decreased profits of the business class the investment level also decreases. Investors stop making new investment due to decrease in the price.
C) Decreasing production:
As a result of decreasing in investment the production level also decreases.
D) Decreasing employment:
Due to decrease in investment job opportunities also decreases which reduces employment level.
E) Decreasing income:
As there is a decrease in production and employment the income of the people also decreases.
3. Depression or Slump
If the slow down of general economic activity continue over longer time period and is very severer then it is known as depression phase of the trade cycle.
Characteristics
Following are the characteristics of this phase:
A) Low level of investment:
During this stage investors stop investing and overall investment level reaches to its minimum.
B) Low level of prices:
In this phase there is a fall in the general price level which results in decreased profits of the business class.
C) Low level of production:
During this stage most of the firms reduces their production because of very low profit.
D) Low level of employment:
During this stage employment level also decrease due to fall in investment and production.
E) Low level of income:
During this phase the employment level is very low which reduces the income level of people.
4. Recovery
Characteristics
Following are the characteristics of this phase:
A) Improvement in investment:
In this phase economy starts improving and investors start to invest in the economy which increases overall investment level.
B) Improvement in price:
In this stage the general price level also improves and businessmen starts making profit.
C) Improvement in production:
Due to increase in price level the profit of the sellers increase and as a result they increase their production.
D) Improvement in employment:
In this stage employment level starts improving due to increase in investment and improved economic condition.
E) Improvement in income:
Because of increased employment and high price income level also increase.
