The trade cycle refers to the ups and downs in the level of economic activity which extends over a period of several years. This is also known as Business Cycle or Economic Cycle.
Definition: The term business cycle (or economic cycle) refers to economy-wide fluctuations in production, trade and economic activity in general over several months or years in an economy organized on free-enterprise principles. These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth (an expansion or boom), and periods of relative stagnation or decline (a contraction or recession). Business cycles are usually measured by considering the growth rate of real gross domestic product. Despite being termed cycles, these fluctuations in economic activity do not follow a mechanical or predictable periodic pattern.
Prof. Keynes says: “A trade cycle is composed of periods of bad trade characterized by falling prices and high unemployment percentages while a period of good trade is characterized by rising prices and high employment, percentages.”
Stages Or Phases Of Trade Cycle:
- Slump or Depression: In the period of depression economic activities are low and there is a fall in the national income, employment and production.
- Recovery: This phase develops when the stock with the businessman is exhausted.
- Expansion Phase or Boom: In this phase economic activities increases production, prices, employment, wages, interest rate, profit volume of credit and investment also increases.
- Recession: In this phase the costs begins to increases than the prices.
Features of Trade Cycle:
- Movement in Economic Activity: A trade cycle is a wave-like movement in economic activity showing an upward trend and a downward trend in the economy.
- Periodical: Trade cycles occur periodically but they do not show the same regularity.
- Different Phases: Trade cycles have different phases such as Prosperity, Recession, Depression and Recovery.
Types of Trade Cycle: Dynamic forces operating in a capitalist economy create various kinds of economic fluctuations. These fluctuations can be classified as follows:
- Short-Time Cycle: This trade cycle occur for a short period of time. It is also known as minor cycles. It lasts for about 3-4 years.
- Secular Trends: This trade cycle occurs for a long period of time and is known as Long term cycle. It lasts for about 4-8 years or more. It is also known as major cycle.
- Seasonal Fluctuations: This refers to trade cycles, which take place due to seasonal changes in the economy. For e.g. failure of monsoon can cause a downtrend in the economy which may be followed by a good monsoon and up to trend.
- Irregular or Random Fluctuations: These trade cycles are unpredictable and occur during a period of strikes, war, etc., causing a shock to the economic system.
- Cyclic Fluctuation: These fluctuations are wave-like changes in economic activity caused by recurring phases of expansion and contraction. There is an upswing from a trough (low point) to peak and downswing from the peak to trough caused due to economic changes in demand, or supply or various other factors.
Conclusion: Though trade cycles differ in timing, they have a common pattern of sequential phases.
Duration: The duration of trade cycles may vary from a minimum of 2 years to a maximum of 12 years.
Dynamic: Business cycles cause changes in all sectors of the economy. Fluctuations occur not only in production and income but also in other variables like employment, investment, consumption, rate of interest, price level, etc.
Phases are Cumulative: Expansion and contraction in a trade cycle are cumulative, in effect, i.e. increasing or decreasing progressively.
Uncertainty to businessmen: There is uncertainty in the economy, especially for the businessmen as profits fluctuate more than any other type of income.
International Nature: Trade Cycles are international in character. For e.g. Great Depression of 1930s.