Trade Cycles Flashcards
Definition of Trade Cycle:
“Business cycles are fluctuations in general business activity that appear through the inter-related fluctuations of many specific cycles”. Estey
“The business cycle in the general sense may be defined as an alteration of periods of prosperity and depression, of good and bad trade”. Haberler.
“Business cycles consist of recurring alternations of expansion and contraction in the aggregate economic activity; the alternating movements in each direction being self-reinforcing and pervading virtually all parts of the economy”. Gordon.
Characteristics of Trade Cycle:
Mitchell and Burns have given following characteristics of a trade cycle.
Identical in duration.
International in nature
Difference in degree
Difference in ups and downs
Regular intervals
Difference in trade cycle
Features of boom and depression
Variation in duration
Self correcting nature.
Phases of a Trade Cycle:
There are four phases of a trade cycle. (i) Expansion / Boom ii) Recession (ili) Contraction / Depression (iv) Revival.
Expansion / Boom:
In this phase, entrepreneurs are optimistic about future. They employ labourers on plants and machineries to produce more goods. Hence, demand for raw material goes up, their prices rise and therefore cost of production and genéral price level also goes up. To meet the demand for me. goods entrepreneurs press for more credit facilities. As a consequence, rate of interest rises and likewise the rewards to other factors of production also move upward. Then incomes of the people rise, tax rates and prices rise as well. Entrepreneurs become more optimistic, they increase investment level, national income rises continuously and the economy attain full employment. This is known as the boom of a trade cycle.
Recession:
When increase in the cost of production exceeds the rate of increase in the general price level, profit margin of entrepreneurs falls. They squeeze their investment which creates a situation of panic and the banks ask for the return of loans. Some firms declare themselves bankrupt. Thus Investment, output, income level falls and employment level also goes down. Commodity markets do not find customers. Hence the whole economy marches downward. This transitory phase is known as the recession period of a trade cycle.
Contraction / Depression:
In this phase, profit expectations of entrepreneurs are bleak due to which investment, income, output level fall which eventually results in massive unemployment. Wage rates are cut down, prices of raw materials fall and investment is not provoked even at the lowest rate of interest. This is merely because during a depression period, investment would yield nothing but losses.
Revival/Recovery:
When consumers find themselves short of durable consumer goods, they create demand for them. Producers make full use of the opportunity and start expanding their plants and machinery. Investment, employment and income level goes up.
Gradually rewards to factors of production increase, therefore, national income and per capita income also increase. With an increase in saving and investment, banks advance loans and supply of money increases. With a rise in the general price level, rate of profit goes up and entrepreneurs restore confidence in business ventures. This upward tendency is called revival phase of a trade cycle.
Psychological Theory of Trade Cycle:
According to this theory, entrepreneurs are so sensitive that they generate cyclical situation by their own feelings of optimism and pessimism. Whenever they feel that future business prospects are bright, they would actually make it bright and conversely, they would make it bleak under the feeling of pessimism which is called depression.
Innovation Theory: Innovations lead to an increase in the demand for capital goods due to which investment, output, income and employment level increase. This generates expansion in the economy. When supply of goods and services overlaps demand for them, prices fall and profit of entrepreneurs as well. Hence excessive innovations result in depression in the economy.
Purely Monetary Theory:
Acccrding to Hawtrey, expansion and contraction take place automatically and business cycles are self-generating cycles. He says that cyclical fluctuations depend purely on the changes which occur in money supply and that are brought about by the creation of credit money by commercial banks.
The Investment Theory:
According to Keynes, fluctuations in national income are a result of fluctuations in the level of investment. Whenever investment increases, it results in the growth of production and restoration of business confidence. This ultimately sets a stage for expansion of the economy. Vigorous competition among entrepreneurs leads to a fall in the general price level due to which rate of return falls. Investment, output and income level falls. This establishes the phase of contraction.
LONG. What is trade cycle? Explain its main characteristics.
Characteristics of Trade Cycles
Trade cycles, also known as business cycles, are recurring fluctuations in economic activity in capitalist economies. They are marked by periods of prosperity (boom) followed by periods of decline (depression). These cycles impact production, employment, income, and overall living standards.
Introduction to Trade Cycles
The trade cycle is a significant feature of modern economies. It consists of four distinct phases, each with its unique characteristics and effects on the economy. The economy constantly moves from one phase to another, creating a full cycle.
Phases of Trade Cycles
1. Depression or Slump:
• This is the lowest point of the cycle where economic activity slows down to a halt.
• Features: High unemployment, low production, falling prices, and reduced profits.
2. Recovery or Revival:
• In this phase, the economy starts to recover from the depression.
• Features: Rising demand, increasing production, and improved employment levels.
3. Boom or Prosperity:
• This is the peak of economic activity where income, production, and employment are at their highest.
• Features: Rising wages, increased investment, and inflationary pressures.
4. Recession or Contraction:
• This phase occurs when the economy starts to decline after the boom.
• Features: Overproduction, falling prices, reduced profits, and rising unemployment.
Now that we have a basic understanding of the phases of trade cycles, let’s explore their main characteristics.
Main Characteristics of Trade Cycles
Trade cycles have several features that make them unique. These characteristics help us understand how economies behave during different phases of the cycle.
- Identical in Duration• Trade cycles in different industries often occur at the same time.
• For example, during a boom, all industries tend to flourish because prosperity in one industry positively affects others. Similarly, during a depression, the downturn in one sector leads to a decline in related industries.
• Reason: Industries are interconnected through supply chains, investments, and labor markets.
Example:
In the 2008 Global Financial Crisis, the collapse of the housing market in the USA triggered a global recession, affecting industries like construction, banking, and manufacturing worldwide.
- International in Nature• Trade cycles are not limited to a single country; they often spread globally due to international trade.
• When a depression hits one country, its effects ripple through others. For instance, if a country reduces its prices to compete internationally, other countries are forced to do the same, leading to a global depression.
Quote:
According to Keynes, “In an interconnected world economy, no country can remain immune to the effects of a trade cycle.”
Example:
The Great Depression of the 1930s originated in the USA but affected Europe and Asia as well due to global trade linkages.
- Difference in Degree• Although trade cycles occur in all industries simultaneously, their intensity varies across sectors.
• For example:
• In agriculture, the impact of a depression might be less severe compared to industries like manufacturing or technology.
• Similarly, during a boom, some industries may grow faster than others based on demand and innovation.
Explanation:
The degree of impact depends on factors such as market demand, capital investment, and technological advancements in a particular sector.
- Regular Intervals• Trade cycles generally occur at regular intervals, with each cycle lasting 8–12 years on average.
• Economists have studied patterns in these cycles and found that recovery, boom, and depression phases follow one another in a predictable sequence.
Quote:
Prof. Samuelson stated, “Business cycles are like the tides; they come and go, but their rhythm is unmistakable.”
Note: The exact duration may vary depending on factors like government policies, global events, and technological changes.
- Difference in Ups and Downs• The recovery phase is usually slower than the transition from boom to recession.
• During recovery, businesses cautiously expand due to lingering uncertainties, whereas during a recession, economic activities contract rapidly due to panic and reduced demand.
Explanation:
The speed of economic growth and decline is not symmetrical because psychological factors like optimism and pessimism play a significant role.
- Features of Boom and Depression• Each phase of the trade cycle has distinct features:
• Boom: High prices, high wages, increased employment, and rising profits.
• Depression: Low prices, falling wages, mass unemployment, and reduced profits.
Example:
During a boom, businesses experience high demand, leading to price inflation. Conversely, during a depression, businesses struggle to sell their goods, leading to deflation.
- Self-Correcting Nature• The two extreme phases—boom and depression—carry the seeds of their own end.
• During a boom, overproduction causes a fall in prices, leading to a recession.
• During a depression, depleted inventories and pent-up demand lead to recovery.
Explanation:
The cyclical nature of trade cycles ensures that the economy corrects itself over time.
- Difference in Trade Cycles• No two trade cycles are exactly the same, although they share common features.
• Each trade cycle differs based on its causes, intensity, and duration.
• For example, some cycles are driven by technological innovation (like the Industrial Revolution), while others are caused by financial crises (like the 2008 recession). - Variation in Duration• The duration of trade cycles can vary:
• According to Prof. Kitchen, some trade cycles last around 3 years and 4 months.
• Prof. Jugglar observed cycles lasting 9–10 years.
• Prof. Kondratieff identified long-term cycles lasting 50–60 years.
Conclusion:
The length of a trade cycle depends on factors like economic policies, technological progress, and global events.
Conclusion
Trade cycles are an inevitable feature of capitalist economies. They bring both opportunities and challenges, influencing every aspect of economic life, from production to employment and from prices to profits. By understanding the characteristics of trade cycles, policymakers and businesses can prepare for their effects and take steps to minimize their adverse impacts.
Quote:
As Prof. Keynes remarked, “Economic cycles teach us that no boom lasts forever, and no depression is permanent.”
LONG. Describe different phase of a business cycle and illustrate them with the help of a diagram?
Trade Cycle
Economic activities never remain constant in a capitalist economy. Sometimes, the economy grows rapidly with rising income and employment levels. At other times, it faces a slowdown with declining income and increased unemployment. These fluctuations are known as the Trade Cycle or Business Cycle.
Definition of Trade Cycle
• Prof. Keynes in his book “Treatise on Money” defined a trade cycle as:
“A trade cycle is composed of periods of good trade characterized by rising prices and low unemployment, alternating with periods of bad trade characterized by falling prices and high unemployment.”
• Prof. Hanson explains:
“Trade cycle is the fluctuation in employment, production, and prices.”
• Prof. Haberler called trade cycles:
“Just the names of prosperity and adversity, good trade and bad trade.”
• Prof. W.C. Mitchell said:
“Trade cycles are the fluctuations in the aggregate economic activity. Any trade cycle starts from depression, moves into recovery, then boom, and finally turns into recession.”
These definitions highlight that trade cycles are recurring patterns of economic ups and downs in capitalist systems.
Phases of Trade Cycle
1. Depression (Slump)
2. Recovery (Revival)
3. Boom (Prosperity)
4. Recession (Contraction)
1. Depression or Slump
• This is the lowest phase of the trade cycle where economic activities come to a standstill.
• Production is extremely low, unemployment is very high, and demand for goods falls drastically.
• Entrepreneurs face losses, and many close their businesses. Banks reduce loans, and people lose hope in the economy.
Key Features of Depression:
• Production and employment levels are at their lowest.
• Prices of goods fall as there is less demand in the market.
• Entrepreneurs face continuous losses, leading to bankruptcies.
• People hold back on spending due to uncertainty about the future.
• Banks stop lending money, and interest rates fall.
• Investments come to a halt, further deepening the economic slump.
Example:
During the Great Depression of the 1930s, factories shut down, unemployment rose to extreme levels, and poverty was widespread.
- Recovery or Expansion
• After the phase of depression, the economy slowly starts to recover.
• Demand for goods rises slightly, encouraging businesses to resume production.
• Entrepreneurs invest in new machinery and equipment, creating new job opportunities.
• Optimism begins to return as people start spending, which increases national income and employment.
Key Features of Recovery:
• Production increases to meet rising demand.
• Employment rises, and people start earning better wages.
• Entrepreneurs feel confident and increase their investment.
• Prices, wages, and profits rise slowly but steadily.
• Banks start lending again, encouraging businesses to expand further.
Quote: As Prof. Schumpeter said, “The seeds of recovery are often sown during the depths of depression.”
- Boom or Prosperity
• The recovery phase leads to prosperity, also called a boom.
• Economic activities are at their peak, with high employment, high incomes, and rising living standards.
• Businesses expand rapidly, and profits are at their maximum.
Key Features of Boom:
• The economy reaches full employment, and unemployment is at its lowest.
• National income and production are at their highest levels.
• Entrepreneurs enjoy high profits and invest heavily in expanding their businesses.
• Demand for labor increases, leading to higher wages.
• Prices of goods rise due to high demand, causing inflation.
Quote: According to Haberler, “Boom represents the golden age of economic activity.”
However, during the boom, overproduction often takes place, which plants the seeds for the next phase—recession.
- Recession or Contraction
• During the boom, when businesses produce more goods than the market can absorb, recession begins.
• Excess production leads to a fall in prices, forcing businesses to cut back on production.
• Employment falls as factories shut down or reduce their workforce.
Key Features of Recession:
• Production declines as businesses reduce output.
• Entrepreneurs face losses due to falling prices.
• Unemployment rises as businesses lay off workers.
• National income and living standards start declining.
• Investment falls, and banks demand loan repayments.
Example :
The 2008 Global Financial Crisis was a classic example of a recession, where housing markets collapsed, and businesses across the globe faced severe losses.
Additional Insights into the Trade Cycle
1. Causes of Trade Cycles:
• Economic Factors: Fluctuations in demand, overproduction, and technological changes.
• Psychological Factors: Optimism during booms and pessimism during depressions.
• Financial Factors: Changes in credit availability, interest rates, and government policies.
2. Importance of Trade Cycles:
• Trade cycles teach businesses and governments to be cautious and prepare for downturns.
• They highlight the need for sustainable production and consumption.
3. How Governments Respond to Trade Cycles:
• During depression: Governments introduce stimulus packages to boost spending.
• During boom: They impose taxes and control inflation to prevent overheating of the economy.
Diagram of the Business Cycle
A trade cycle can be visualized with the following diagram:
• The x-axis represents time.
• The y-axis represents economic activity (such as GDP, employment, or income).
• The curve alternates between four phases: Depression, Recovery, Boom, and Recession.
Conclusion
Trade cycles are a natural part of capitalist economies. While they bring economic growth and prosperity during booms, they also pose challenges during recessions and depressions. Governments, businesses, and individuals must learn to navigate these fluctuations wisely.
As W.C. Mitchell said:
“Trade cycles are like the seasons of the economy—each phase prepares the way for the next.”
By understanding trade cycles, economies can strive for stability and long-term growth while minimizing the adverse effects of downturns.
trade cycle in the words of Prof Keynes?
A trade cycle is composed of periods of good trade characterized by rising prices, and low rate of unemployment, alternating with periods of bad trade characterised by falling prices and high rate of unemployment.
Define trade cycle in the words of Prof Hanson?
Ans: Trade cycle is fluctuation in employment, production and prices.
