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2/5/2010

Trade Cycle

Amay Kothari

Introduction
„ The alternative of Upswing and Downswing in
economic activities are called Trade Cycle.
„ These fluctuations affect prices, employment,
income and output.
„ A complete cycle can have four different phases
… Depression
… Recovery
… Prosperity
… Recession

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Characteristic of Trade Cycle


„ These fluctuations are recurrent
„ The time of occurrence of each phase is
not predictable.
„ Often a cycle is 6 – 7 years.

The Trade Cycle

Boom
Economic Activity

Depression

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

No of Years

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Depression
„ The demand of goods and service is low.
„ It affects capital goods and than consumer
goods
„ Prices of goods come down.
„ Business activity is at a very low which affects
transport and other commercial activities.
„ The rock bottom is the Slump
„ Procurers suffers losses because by the time the
goods are produced the prices fall.

Depression
„ No incentive for new investment
investment, in spite
of low interest rate.
„ There is no employment
„ Accumulation of reserve in banks, velocity
of ccirculation
o cu a o iss low.
o
„ Debts repayment registers a fall and
demand for credit is also low.

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Recovery
„ This is a state of revival of demand and services
services.
„ The surviving firms then world find it
advantageous to reap the benefits of low wages
and low interest to build up for future
„ During this the phase price start rising.
„ P d ti picks
Production i k up
„ Employment situation improves and construction
activity is revived.

Prosperity
„ In this phases output and incomes go up at a
rapid pace.
„ A high growth is achieved through higher
investment and employment.
„ There is a great incentive for investment even at
higher rates of interest; wages also go up.
„ Thus a general optimism and cheerful mood
prevails in business highest state of prosperity is
called the boom.

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Recession
„ The very phenomenon of over – optimism and
excessive investment in log gestation periods
sow the seeds of recession.
„ The high profitability during the boom period
encourages the investor to over invest which
ultimately leads to over production while the
demand may not show a corresponding rise rise.
„ Excess supply of goods over demand
„ Fall in price and profits.

Economic Variables under the Phase of Trade


Cycle
Variables Depression Recovery Prosperity Recession
Employment Sudden set
Fails Rises Slowly
y Rises High
g
Back
Ind. Output Low Picks Up High Decreasing
Prices Low Rise Gently High Fall rapidly
Bank Loan Less Sought South amply Fall sharply
Profits
Disappear Starts Appearing High Fails

Business
M
Many F
Few R
Rare S
Some
Failures
Business
Accumulate Clear Off Low Appear
Investment
Construction Negligible Picks Up Grows Fast Stops Suddenly
Business Optimistic &
Pessimistic cautious Hesitant
Bright

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Theories
„ Climatic Theory
… The climatic changes cause variations in
agricultural production and through that the
economics activity.
… Over – production theory states that in a
capitalist systems where the production is the
result of the decisions of thousand of
producers, over estimate of demand and
consumption occurs.
… Market are guttered and the price fall down.

Theories
„ Monetary theory
… The supply of bank money is the basic cause
of trade cycles.
… When bank are liberal with supply of credit,
trades are induced to hold larger stock than
normal.
normal
… More material are purchased and more men
are employed.
… Income and prices rise and there are boom.

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Theories
„ Monetary theory
… But soon the banks find that what they have
created, their reserves are low and too much
credit etc.
… Bank them stop or restrict credit card and call
back loans
loans.
… Traders are forced to sell their stock now,
process fall, unemployment results,
depression prevails in the economy.