A trade cycle refers to fluctuations in economic activities especially in employment, output and income, prices, profits etc. it’s been defined differently by different economists. Consistent with Mitchell, “Business cycles are of fluctuations within the economic activities of organized communities. The adjective ‘business’ restricts the concept of fluctuations in activities which are systematically conducted on commercial basis.
Phases of Trade Cycle:
(1) Recovery:
In the early period of recovery, entrepreneurs increase the extent of investment which successively increases employment and income. Employment increases purchasing power and this results in a rise in demand for commodity .
As a result, demand for goods will press upon their supply and it shall, thereby, cause an increase in prices. The demand for consumer’s goods shall encourage the demand for producer’s goods.
The rise in prices shall rely upon the gestation of investment. The longer the period of investment, the upper shall be the price rise. the increase of prices shall cause a change within the distribution of income. Rent, wages, interest don’t rise within the same proportion as prices.
Consequently, the margin of profit improves. The wholesale prices rise quite retail prices. the prices of raw materials rise over the prices of semi-finished goods and therefore the prices of semi-finished goods use over the prices of finished goods.
(2) Boom:
The rate of investment increases still further. because of the spread of a wave of optimism in business, the amount of production increases and therefore the boom gathers momentum. More investment is feasible only through credit creation. During a period of boom, the economy surpasses the extent of full employment and enters a stage of over full employment.
(3) Recession:
The orders for raw materials are reduced on the onset of a recession. The rate of investment in producers’ goods industries and housing construction declines. Liquidity preference rises in society and due to a contraction of money supply, the prices falls. A wave of pessimism spreads in business and those markets which were sometime before sellers markets become buyer’s markets now.
(4) Depression:
The main feature of a depression may be a general fall in economic activity. Production, employment and income decline. the prices fall and therefore the main factor accountable for it is, a fall in the purchasing power.
The distribution of national income changes,because the costs are rigid in nature, the margin of profit declines. Machines aren’t accustomed their full capacity in factories, because effective demand is far less. the prices of finished goods fall but the prices of raw materials.
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