The trade cycle refers to the ups and downs in the level of economic activity which extends over a period of several years. If we examine the past statistical record of the business conditions, we will find that business has never run smoothly for ever. There are many fluctuations in the period. Some times prosperity is followed by adversely. In Economics this tendency of the business activities, to fluctuate from prosperity to adversely is called business cycle.
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 :-There are four phases of trade cycle, depression , recovery, boom and recession. Let us discuss one by one.
Slump or Depression :-In the period of depression economic activities are low and there is a fall in the national income, employment and production. The costs are relatively higher than the prices. Profit falls and there is a reduction in the consumer and capital goods, producer suffers loss. Bank credit demand also falls. Effective demand and savings remains low. In the world this phase occurred in 1710, 1837, 1873, 1893, 1907, and 1929.
2. Recovery :-This phase develops when the stock with the businessman is exhausted. Due to this cost begins to decline and the prices which are at its lowest level stop falling further. There is complete harmony between cost and price. Profit begins to re-appear in the business. The repairs and replacement of capital equipment starts. There is a gradual re-employment of labour. The money income increases the purchasing power. Govt. also starts some productive and non-productive projects. The commercial banks also expand the credit. The marginal efficiency of capital begins to rise and rate of investment increases.
3. Expansion Phase or Boom :-In this phase economic activities increases production, prices, employment, wages, interest rate, profit volume of credit and investment also increases. New plants and factories are set up and old ones are fully utilized. Demand for labour increases and there is a rich profit.
Note :- It is not necessary that boom should reach the level of full employment.
4. Recession :-In this phase the costs begins to increases than the prices. Because the less efficient factors of production are employed at higher costs. The profit begins to disappear. A wave of pessimism and uncertainly prevails in the business. There is a fall in the production, Investment and employment. Even the businessman closing the business.
The recession phase comes to an end and goes into depression. These four phases goes on replacing each other.
ACCORDING TO SAMUELSON :- " Business conditions never stands still. Prosperity is followed by panic."