NMIMS UNIVERSITY

TRADE CYCLES
By
Prof. NEHA SATOLIYA
Assistant Professor
Economics
INTRODUCTION
 The business cycle is also known as the
economic cycle or trade cycle.
 The business cycle describes the rise and fall
in production output of goods and services
in an economy.

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DEFINITIONS

• “A trade cycle is composed of periods of good trade

characterized by rising prices and low unemployment
John Maynard percentages altering with periods of bad trade characterized
Keynes by falling prices and high unemployment percentages”.

• “A business cycle is a swing in total national output and

employment, usually lasting for a period of 2 to 10 years,
Samuelson marked by widespread expansion and contraction in many
and Nordhaus sectors of the economy.”

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FEATURES OF TRADE CYCLE
• Trade cycle causes change in all sectors of the economy.
• Fluctuations occur not only in production and other variables
PERIODICAL: like employment , investment, rate of interest , etc.

• The duration of trade cycle may vary of 2 years to 12 years.

DURATION:

UNCERTANITY • It is uncertainty in the economy for businessman a profit is

more fluctuate more than any type of income.
TO
BUSINESSMAN
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 • In the sense that fluctuations in one country get transmitted
INTERNATIONA to other countries.
L NATURE: • In this age of globalization, dependence of one country on
other countries is great.

• Business cycle is not periodical. Though fluctuation in the

range of 5-10 years.
DYNAMIC:

• Rising consumption, production and real GDP

• Increase in employment
EXPANSIONS • Rise in prices
• Rise in profits, demand for credit and stock prices

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 • Falling consumption , production and real GDP
• Increase in unemployment
CONTRACTION: • Fall in prices
• Fall in profits , demand for credit and stock prices

• Expansion and contraction in trade cycle are cumulative in

PHASES ARE effect i.e. increasing or decreasing progressively.
CUMULATIVE:

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PHASES OF TRADE CYCLE
Peak
 A full trade cycle has

Prosperity
got four phases: Peak
d
i. Recovery, Tren

Re
Peak

Prosperity
ce
ss
ion
ii. Boom/

Prosperity

Re
ce

Recovery
De
Prosperity,

ss

p
ion

re
ss
Recovery
De

ion
iii. Recession, and

pr
e
Trough

Recovery

ss
ion
iv. Depression.
Trough

Trough

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1. Recovery
 During depression phase economy slowly moves
towards recovery due to exogenous or
endogenous factors
 Those consumers delayed their consumption in
the hope of decrease in prices, now come back to
consumption. As the consumption starts in the
economy businesses becomes profitable. There is
noticeable re-employment in the economy.
 Business optimism exists due to recovery and thus boosting credit and
investments
 Costs and output is less elastic and this results in rise in prices

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A programme of us Govt. to facilitate recovery

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2. Prosperity
 Bank credit and investments grows rapidly due to
high profitability
 Excess capacity gradually disappears creating
shortage of labour and raw materials. After full
employment is achieved further increase in
demand and it leads to increase in prices but rise
in costs is less as compared to rise in prices. This
leads to business to remain profitable.
 The economy continues to grow as investment and output rise. However
it then reaches a point where there is stagnation of demand. This point of
highest prosperity is called peak

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Expansion of Indian stock market

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3. Recession
  In the previous stage banks were engaged in
advances, however in recession stages, now have
shifted towards loans recovery. Investments in
stocks reduces due to uncertainty.
 The cost begins increase more than the prices due
to employment of less efficient factors of
production with higher cost. As a result there a
gradual decline in profits

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Growth in UK during 2008 recession

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4. Depression
 Under the depression phase both economic
activities and national income fall and the cost
is comparatively higher than price.
 Level of profit decreases and there is a
reduction in the consumer and capital goods.
 Bank credit and deposits shrink due to low
economic activity
 Investments in stocks and business is less
profitable and attractive

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Stock index during Great Depression of 1932 in USA

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CONTROL OF TRADE CYCLE
 Trade cycle not only harm business activities but also human beings by
creating Unemployment, Poverty, Inflation, leading to deficit budget, etc.
Thus there is a need for stabilizing the economy. This can be achieved
using
o Monetary Policy
o Fiscal Policy

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CONTROL OF TRADE CYCLE (Cont.)

SLR CRR

Selective
OMO Credit
Control

Monetar Repo &

Bank Rate Reverse
y Policy Repo Rate

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 CONTROL OF TRADE CYCLE (Cont.)
 Fiscal Policy:

Reducing taxes
Increase in
& Increasing Full Increase in Increase in
DEPRESSION Purchasing Economic
Public employment AD GDP
Power Growth
expenditure

Increasing
Decrease in
taxes & Fall in Decrease in Fall in
INFLATION Purchasing Decrease in AD
Reducing Public employment GDP Economic
Power
expenditure Growth

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REFERENCES
 http://www.economicsdiscussion.net/trade-cycle/trade-cycle-meaning-
features-and-theories/21071
 https://kalyan-city.blogspot.com/2011/07/what-is-trade-cycle-meaning-
definition.html
 https://www.economicshelp.org/macroeconomics/economic-growth/
trade-cycle/
 https://www.investopedia.com/terms/b/businesscycle.asp

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THANK YOU
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