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Trade Cycles

The document discusses the phases of the trade cycle, which refers to periodic changes in the level of economic activity over several years. There are five phases: inflation, boom, deflation, recession, and depression. Inflation occurs when economic activity increases past full employment. Boom is the peak level of activity. Deflation is a downward trend after boom. Recession is when activity falls below full employment. Depression is the lowest level, with market collapse and widespread unemployment. Recovery begins as markets start to improve due to government policy. The causes of trade cycles have not been fully explained.

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58 views2 pages

Trade Cycles

The document discusses the phases of the trade cycle, which refers to periodic changes in the level of economic activity over several years. There are five phases: inflation, boom, deflation, recession, and depression. Inflation occurs when economic activity increases past full employment. Boom is the peak level of activity. Deflation is a downward trend after boom. Recession is when activity falls below full employment. Depression is the lowest level, with market collapse and widespread unemployment. Recovery begins as markets start to improve due to government policy. The causes of trade cycles have not been fully explained.

Uploaded by

sasiforever06
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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ECONOMICS FOR MANAGERS

Trade Cycles

Periodic changes in the level of economic acclivities in the long run are commonly
termed as trade cycles. The level of economic activity periodically, increases and reaches
a peak, shows a change in trend, decreases and bottoms out and finally, changes trend
towards increase. Such cyclical changes in the level of economic activities constitute the
trade cycle. Trade cycle is a neoclassical concept of macro economics which tries to
explain the changes in the economic activities with respect to time. The concept of trade
cycle was initially developed by Joseph Schumpeter. The different phases in the trade
cycle are named in relation to the full employment level.
Accordingly, there are five phases of trade cycle:

1. Inflation
2. Boom
3. Deflation
4. Recession
5. Depression, and
6. Recovery

1. Inflation:
When the economic activity increases after full employment level, it is called
inflation. During inflation, the demand pressures will be high. Increasing demand leads to
increasing product prices, increasing demand for factors, higher wages and then
increasing demand again.

2. Boom:
Boom refers to the peak in the level of economic activity after full employment.
The demand pressures will be at the peak. The price level will be very high.
3. Deflation:
It is the downward trend in the economic activities after boom. At boom level the
Government will take corrective measures due to which the economic activity will show
a change in trend.

4. Recession:
When the economic activity reduces below full employment It is called
recession. The level employment will decreases, the prices will decrease and the
economic activity shrinks.

5. Depression:
This is the lowest level of economic activity. The markets collapse. Large scale
unemployment will lead to poverty and suffering. The world experienced Great
depression during 1929 and 1933.

6. Recovery:
From the lowest levels of economic activity the markets recover due to positive
Government policy. The economic activity will increase towards full employment. Three
will be increase in the level of employment, incomes, investment and demand. The
reasons for the occurrence for the trade cycle has been not yet explained satisfactorily.
The Sun spot theory relates the level of economic activity with the number of sun spots.
In absence of any other theory, the Sun Spot theory still holds valid.

The trade cycle refers to the ups and down in the level of economic activity which
extend over to a period of several years. A cycle has different phases like expansion,
recession, contraction and revival. The duration of business cycle may be one year to ten
or twelve years. There are four phases of business cycle one of these is boom or phase of
prosperity. Boom or Phase of Prosperity: This phase is characterized by high economic
activities and increasing production employment, profit, national income, investment,
wages and volume of bank credit.

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