DEPERMENT OF TEACHNICAL EDUCATION

ANDHRA PRADESH
Name : R. Mohan
Designation : Head of CCP
Branch : Commercial and Computer practice
Institute : GMR Polytechnic, Gajwel
Year/Semester : III Yr/VI sem
Subject : Business economics-II
Sub. Code : CCP-602
Topic : Trade Cycles
Sub Topic : Causes of Trade Cycles
Duration : 50 minutes
Teaching Aids : PPT Animations
CCP.602.49 to 51 1
Objectives
On completion of this period you will be able
to know
 Causes of Trade Cycles
 Internal Factors
 External Factors

CCP.602.49 to 51 2
Recap

 Stages of Trade Cycles

 Prosperity (inflation)
 Recession (disinflation)
 Depression (deflation)
 Revival (reflation)

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Causes of Trade Cycles

 Internal Factors
 External factors

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Internal Factors
 Refer to those causes working from within the
economic system
 Gives rise to self-generations and recurring
business cycles.

CCP.602.49 to 51 5
Internal Factors

 Monetary factors
 Under – consumption ( over-saving)
 Over investment
 Business Psychology
 Innovations
 Changes in the marginal efficiency of capital

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Monetary Factors

 Excessive expansions and contractions of

money supply especially through bank credit

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 Contd.,

 Strategic role of merchants determines the level

of economic activity in response to change in the
discount rate.

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 Contd.,

 Changes in the flow of monetary demands

 Role of the so – called drain and recall of
bank reserves

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Under - Consumption
 Economists like Malthus regard inequalities in
the distribution of wealth and income in the
community leading to under consumption and
excess saving cause business cycle
 Accompanied by use of more capital- intensive
methods of production.

CCP.602.49 to 51 10
 Contd.,

 Thus unequal distribution of income leads to

 Excess saving and capital formation
 Quantities of consumption goods will rise leading to
prosperity
 This stage of prosperity cannot last long due to
inequality in the distribution of incomes

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 Contd.,

 Total consumption will be less to lift the entire

output in the market
 Leading to depression

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Over - Investment
 Cheaper money encourages the producers to
invest in business activities where there is
lower cost of production ,hence
 Higher rate of profit.

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 Contd.,

 Over investment of economic resources will

take place in the capital goods
 On account of cheap credit

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 Contd.,

Thus
 Un planned changes in the structure of
production will take place
 there will be a divergence between the
market rate and natural rate of interest.

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 Cond.,

 Market rate of interest is the result of

monetary forces over short period
 Natural rate of interest is the result of the
operation of long- term factors

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Business Psychology

 Business community is generally over

sensitive and
 Over-reacts to economic situations.

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 Contd.,

 Collective business behavior of businessmen

generates cyclical movements in economic activity.

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 Contd.,

 Periods of business optimism followed by

those of pessimism
 Results in psychological waves.

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Innovations
 Another cause of business cycle is innovation
Innovation means commercial application of a new invention
Innovation can be broadly classified as follows
 Introduction of a new product
 Adoption of a new method of production
 Opening of a new market
 discovery of new source of raw-materials
 Change in the organisation of industry.
 Eg., formation of monopoly etc.,

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 Contd.,

 Introduction of an innovation spells a start

for the business cycle
 Supply exceeds demand

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 Contd.,

 Demand for old products goes down.

 Prices fall and consequently
 The producers and firms are forced to
contract their output

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 Contd.,

 Quantity of money in circulation is reduced as a result

of which prices tend to fall and profit decline

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 Contd.,

 Uncertainty and risks increase

 Depression sets in

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 Contd.,

 Economy can not continue in depression for

long
 Innovation minded entrepreneurs continue
their search for profitable innovations

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Changes in the marginal efficiency
capital
 Booms and depressions are the result of
fluctuations in the marginal efficiency of
capital ( M E C)

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 Contd.,

Depends on
 Series of prospective yields from investment in the new
capital assets
 Surplus of the new capital assets.

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 Contd.,

 Continued rise in investment

 Additional capital goods would not be
demanded
 Saturation of demand
 Contraction phase sets in

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External Factors
 Which operate from outside the economic
system
 Factors on which the business community has
no control

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External Factors
Natural Factors
 Wealth conditions and
 Rate of growth of population.

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 Other factors
 Oil crisis
 Civil wars
 Political crisis etc.

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Conclusion
 Business cycle are caused by a mixture of
internal and external factors.

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Summary
 There is no single factor which can be identified as
the cause of business cycle . A number of factors
both internal and external causes business cycle

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 Quiz
1. Output and employment tend to fall fast during
the_________
2. __________shows the upturn of the out put and
employment of the economy from the state of
depression
Answer: 1.depression
2. recovery

CCP.602.49 to 51 34
Quiz

3. Expanding productive activity takes the economy to a

____________stage.

4. The whole economic system runs into crisis during

________ stage
Answer 1. prosperity
2. depression

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Frequently Occurs Question
1. Define the following :
b) Depression
c) Recovery
d) Boom
e) Deflation

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Assignment
1. Define trade cycles
2. What are the causes of business cycles

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Thank You

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