The trade cycle refers to the ups and downs in the level of economic activity which extends over a period of several years. If we examine the past statistical record of the business conditions, we will find that business has never run smoothly forever. There are many fluctuations in the period. Sometimes prosperity is followed by adversely. In Economics this tendency of the business activities, to fluctuate from prosperity to adversely is called business cycle. Prof. Keynes says: " A trade cycle is composed of periods of bad trade characterized by falling prices and high unemployment percentages while a period of a good trade is characterized by rising prices and high employment, percentages."

1. TRADE CYCLE
Dr.M.Madhavan
Assistant Professor of Economics
Arignar Anna Government Arts College
Namakkal, Tamil Nadu, India

2. INTRODUCTION
 The trade cycle refers to the ups and downs in the level of economic
activity which extends over a period of several years. If we examine the
past statistical record of the business conditions, we will find that
business has never run smoothly forever. There are many fluctuations in
the period. Sometimes prosperity is followed by adversely. In
Economics this tendency of the business activities, to fluctuate from
prosperity to adversely is called business cycle.

3. DEFINITION
Prof. Keynes says : " A trade cycle is composed of
periods of bad trade characterized by falling prices
and high unemployment percentages while a
period of good trade is characterized by rising
prices and high employment, percentages.“
SAMUELSON Says " Business conditions never
stands still. Prosperity is followed by panic."

4. THE TRADE CYCLE

5. STAGES OR PHASES OF TRADE CYCLE:-
There are four phases of trade cycle,
 Depression ,
 Recovery,
 Boom And
 Recession.
Let us discuss one by one.

6. SLUMP OR DEPRESSION
 In the period of depression economic activities are low
and there is a fall in the national income, employment and
production.
 The costs are relatively higher than the prices. Profit falls
and there is a reduction in the consumer and capital
goods, producer suffers loss.
 Bank credit demand also falls. Effective demand and
savings remains low.
 In the world this phase occurred in 1710, 1837, 1873, 1893,
1907, and 1929.

7. RECOVERY
 This phase develops when the stock with the businessman is exhausted.
Due to this cost begins to decline and the prices which are at its lowest
level stop falling further.
 There is complete harmony between cost and price. Profit begins to re-
appear in the business. The repairs and replacement of capital
equipments starts.
 There is a gradual re-employment of labour. The money income increases
the purchasing power.
 Govt. also starts some productive and non-productive projects. The
commercial banks also expand the credit.
 The marginal efficiency of capital begins to rise and rate of investment
increases.

8. EXPANSION PHASE OR BOOM
 In this phase economic activities increases production,
prices, employment, wages, interest rate, profit volume of
credit and investment also increases. New plants and
factories are set up and old ones are fully utilized.
Demand for labour increases and there is a rich profit.
Note :- It is not necessary that boom should reach the level
of full employment.

9. RECESSION
 In this phase the costs begins to increases than the prices. Because the
less efficient factors of production are employed at higher costs.
 The profit begins to disappear. A wave of pessimism and uncertainly
prevails in the business.
 There is a fall in the production, Investment and employment. Even
the businessman closing the business.
 The recession phase comes to an end and goes into depression.
 These four phases goes on replacing each other.

10. CAUSES OF BUSINESS CYCLE
 Let us discuss the causes of business cycle

11. INTEREST RATES
 Changes in the interest rate affect consumer spending and
economic growth For example, if the interest rate is cut,
this reduces borrowing costs and therefore increases
disposable income for consumers.
 This leads to higher spending and economic growth.
However, if the Central Bank increase interest rates to
reduce inflation, this will tend to reduce consumer
spending and investment, leading to an economic
downturn and recession.

12. CHANGES IN HOUSE PRICES
 A rise in house prices creates a wealth
effect and leads to higher consumer
spending. A fall in house prices causes
lower consumer spending and bank
losses. (house prices and consumer
spending) In the late 1980s, the boom
in house prices caused an economic
boom. The drop in house prices in
early 1990s caused the recession of
1991-92.

13. CONSUMER AND BUSINESS
CONFIDENCE
 People are easily influenced by external events. If there is a succession
of bad economic news, this tends to discourage people from
spending and investing making a small downturn into a bigger
recession.
 But, when the economy recovers this can cause a positive bandwagon
effect. Economic growth, encourages consumers to borrow and banks
to lend.
 This causes higher economic growth. Confidence is an important
factor in causing the business cycle.

14. MULTIPLIER EFFECT
 The multiplier effect states that a fall in injections may
cause a bigger final fall in real GDP.
 For example, if the government cut public investment,
there would be fall in aggregate demand and a rise in
unemployment.
 However, those who lost their jobs would also spend less,
leading to even lower demand in the economy.
Alternatively, an injection could have a positive multiplier
effect.

15. ACCELERATOR EFFECT
This states that investment depends on the
rate of change of economic growth.
If the growth rate falls, firms reduce
investment because they don’t expect
output to rise as quickly.

16. INVENTORY CYCLE
Some argue that there is a natural inventory cycle.
For example, there are some ‘luxury’ goods we
buy every five years or so.
When the economy is doing well, people buy
these luxury items causing faster economic
growth.
But, in a downturn, people delay buying luxury
goods and so we get a bigger economic
downturn.

17. CAUSES OF RECESSIONS
The business cycle can go into recession for a
variety of reasons, such as:
Falling house prices causing negative wealth effect
and lower consumer spending
Credit crunch causing an increase in cost of
borrowing and shortage of funds

18. CAUSES OF RECESSIONS …. ….. ……
 Volatile stock markets and money markets
undermining business and investment confidence.
 Higher interest rates causing lower spending and
investment.
 Tight fiscal policy – higher taxes and lower spending.
 Appreciation in the exchange rate.

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