Business Cycle / Trade Cycle.
"The business cycle in the general sense may be defined as an alteration of periods of prosperity and depression, of a good and bad trade."
From this definition, we are able to gather the fact that there are two main phases of a trade cycle i.e. prosperity and depression or good and bad trade. When these two phases follow each other regularly this would be a trade cycle.
Prof. Gordon Defines Trade Cycle as Follows:
**Business cycle consists of recurring alternations of expansion and contraction in the aggregate economic activity, the alternating movements in each direction being the self-reinforcing and prevailing in virtually all parts of the economy.
PHASE OF A TRADE CYCLE:
Since all the sectors of the economy are closely integrated with each other, the business function which occurs in the sectors generate fluctuations in the aggregate sense, These fluctuations can be observed in the national Income, output level, employment level, cost of production, interest rate and other rewards of factors, amount of investment credit money securities, etc.
Business fluctuations can be measured from the boom period of a trade cycle to the boom period of the next trade cycle. From this, we are able to see the various phase of the trade cycle which are four altogether.
Phases of Trade Cycle
Boom
Recession
Depression:
Revival
1. Expansion or Boom:
At this stage, the level of economic activities reaches its peak which is commonly known as the bottom of a trade cycle.
The expansion phase generally starts with an increase in the expected rate of profit. When the entrepreneurs are optimistic about the future business prospects they tend to employ more laborers to work in the plants and machinery so as to produce more goods and services.
2. Recession:
This transitory phase is known as the recession period of a trade cycle.
Conversely, the forces which had generated the expansion automatically bring an end to it as increases in the cost of production of the goods and services exceed the rate of increase in the general price level. Following this, the profit margin of the entrepreneurs starts to decline.
3. Contraction or Depression:
In this phase of the trade cycle national and employment fall to the lowest ebb.
Prices begin to fall to a very low level, credit money is squeezed and similarly the rates
il the factors of production are very low and the economy becomes virtually stagnant at the lowest level of activity. Due to this phenomenon, the investment is not provoked even at the lowest rate of interest possible. This is merely because, during a depression period, the investment would yield nothing but losses.
4. Revival or Recovery:
As a result of the depression and with the passage of time, consumers and producers are determined to overcome the misbehavior of cost of production and the general price level due to which they generate a wave of optimism in the economy.
This upward tendency in all sectors of the economy is called the revival phase of a trade cycle which ultimately leads to another boom.
Phases of Trade Cycle
from the desk of M.A.f Saleem.
