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TRADE CYCLE

Definition:-Trade cycle refers to the up and down in the economic


activity which extends over to a period of several years. According to R.A. Gordon, Business cycles consist of recurring alternations of expansion and contraction in aggregate economic activity, the alternative movements in each direction being self reinforcing and pervading virtually all parts of the economy.

PHASES OF TRADE CYCLE: - There are four types of phases:


1. Expansion or Boom phase

2. Recession phase 3. Depression phase 4. Recovery phase

1.

Expansion phase

:- Expansion is a state of affairs in which the

real income consumed, real income produced and the level of employment are high or rising, and there are no ideal resources or unemployed workers or very few either. The features of this phase are :
a. A large volume of production and trades. b. A high level of employment and job opportunities.

c. A rising price level. d. A rising structure of interest rate. e. A high level of real investment. f. Wage rate is very high. g. The economic reaches full employment by removing unemployment.

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2.

Recession phase:

- when the prosperity ends, the recession

begins. Recession relates to a turning point rather than a phase. It marks the point at which the forces that make for contraction finally win the forces of expansion. As a result, profit margins decline further because costs start overtaking prices. Some firms close down. a. There is fall in income and output. b. Worker are rendered unemployed. c. Prices begin to fall. d. Wages fall. e. Profit fall. f. Demand of the consumers for various goods fall.
g. There is a feeling of a doubt and fear among the people. 3.

Depression phase:-

A state of affairs in which real income consumed or volume of production per head and the rate of employment are falling and are sub-normal in the sense that there are idle resources and unused capacity especially unused labour. There are many characteristics: a. Level of output or income is low. b. Unemployment increases. c. Wages, interest and other cost decline. d. Price level falls. e. Demand for consumer good falls. f.Volume of profit falls sharply. g. Old and worm out machines are not replaced.

4.

Recovery phase:-

Recovery shows the upturn of the output and employment from the state of depression recovery is most probably the result of the fresh demand for plant and equipment arises from the consumer good. The capital goods have the limit life. They wear out

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completely after some time and need replacement. This replacement demand starts the recovery process. The characteristics are as: a. Replacement investment result into increase in income and outputs. b. Employment increases. c. Demand for conception and production good rises. d. Prices begin to look up. e. There are more profits. f.Cost increases relatively less. g. Investment increases. h. Demand for bank loans and advances increases.

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TIME

Fig. Phases of trade cycle

CAUSES OF TRADE CYCLE


Just as there is no regularity in the timing of business cycles, there is no reason why cycles have to occur at all. The prevailing view among economists is that there is a level of economic activity, often referred to as full employment , at which the economy could stay forever. Full employment refers to as full employment, in which economy could stay forever. Full employment refers to a level of production at which all the inputs to the production process are being used, but not so intensively that they wear out, break down, or insist on higher wages and more vacations. When the economy as at full employment, inflation tends to remain constant, only if output moves above or below normal does the rate of inflation systematically tend to rise or fall. If nothing disturbs the economy, the full employment level of output, which naturally tend to grow as the population increases and new technologies are discovered, can be maintained forever. There is no reason why a time of full employment has to give either an inflationary boom or recession. Business cycles do occur, however because disturbances to the economy of one sort or another push the economy above or below full employment. Inflationary booms can be regenerated by surges in private or public spending. For example if government spends a lot to fight a war but does not raise taxes, the increased demand will causes not only an increases in the output of war material, but also an increase in the take-home pay of defense workers. The output of all the goods and services that these workers want to buy with their wages will also increase, and total production may surge above its normal, comfortable level. Similarly a wave of optimism that causes consumers to spend more than usual and firms to build new factories may
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cause the economy to expand dispersions can be caused by substantial cut in government consumers and firms may cause

more rapidly than normal. Recessions and these same forces working in reverse. A spending or a wave of pessimism among the output of all types of goods fall.

Another possible cause of recessions and boom is monetary policy. The Federal Reserve System strongly influences the size and growth rate of money stock, and thus the level of interest rate in the economy. Interest rate in turn is a crucial determinant of how much firms and consumers want to spend. A firm faced with high interest rates may decide to postpone buildings a new factory because the cost of borrowing is so high. Conversely a consumer may be lured into buying a new home if interest rates are low and mortgage payment are therefore affordable. Thus by raising or lowering interest rates, the Federal Reserve is able to generate recessions or booms.

EFFECTS OF TRADE CYCLE


Throughout the trade cycle businesses will suffer from a range of benefits and pressures. These can have a major impact upon the operation of firms, and the awareness of these impacts can often dictate business planning.
1. Improved demand will benefit businesses, turnover increases and so do

profits. As the recovery progresses prices can be increased and profits maximized. There is often pressure to invest, and management of expansion is one difficulty faced by management.

2. Firms must balance maximizing profits with the risks of overextending

themselves should recession come. Should prices be pushed to the limit, or should firms concentrate on providing customer value? Profits will be lost if stocks are not built and sold, but high stock levels can sow the seeds of cash flow and liquidity problems during the recession which is likely to follow.

3. This is the time for shedding labour. Redundancies can be expensive, and can cause resentment and de-motivation amongst those employees who feel their jobs might be the next to go. To prevent these problems
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occurring firms should have a strategy of natural wastage that starts to be used when recovery is at its peak. Performance and productivity improvements can come through efficiency improvements.

4. Many firms believe that this is the time for retrenchment, concentrating on core business strengths. Others may look for the opportunity to buy and employ resources cheap, taking advantage of low costs.

METHODS TO CONTROL TRADE CYCLES


Trade cycle effect the economic lifes adversely. This cycle generate the situation of instability in term of inflation, deflation and unemployment. It is essential to control their occurrence and it can be done pursuing the following policy:
1.

Monetary Policy:- monetary policy refers to a regulation and control


of flow of credit, supply of money and rate of interest in the economy with a view to restore economic stability. Monetary instrument are use to simulate the flow of credit as well as to suppress it during period of inflation, flow of credit needs to be restricted. During the period of deflation cheap monetary policy is adopted. Rate of interest is reduced, government security are purchased in the open market.

2.

Fiscal Policy:-

economic activity of the government has greatly increased in the recent past. The government can significantly influence the occurrence of trade cycle by way of its fiscal policy that relates to its revenue. Fiscal instrument that control the occurrence of trade cycle are generally classified as:

1.

Built in stabilizers:-

These refer to those fiscal parameters that start operating in the system automatically. These are therefore also called automatic stabilizers. These built in stabilizers automatically change the flow of income or money between individual and corporation on the one hand and the government on the other. a. Progressive taxation
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b. Unemployment insurance 1. Progressive taxation :- It is a system of taxation in which rate of

taxation increase with the level of income. In the state of prosperity as the level of income rise progressive taxation ensures more income to the state in term of tax revenue.
2. Unemployment

insurance:-During unemployment tends to increase.

the

period

of

prosperity

2.Discretionary Measure:- These

relates to policy of government specifically design to control cyclical changes in the system. These include Taxation policy, Public expenditure, and Public debt. These measures are of three types:
Changing a public expenditure while tax structure remains constant.

Changing a tax structure, while public expenditure remains constant. Changing both the tax structure as well as public expenditure simultaneously.

3.

Direct controls:following:

Direct control relating to trade cycles include the

a. Price control:- That aim at fixation of price of essential commodities

in the market. Price control also includes the support price policy of the government.
b. Quantity control:- that relates to distribution of goods through fair

price shops called rationing, licensing policy of government fixing production limits for certain strategic producing unit in the country.
c. Wage control:- that aim at the regulation of wages during periods of

inflation and deflation.

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