BUSINESS TRADE CYCLE

Part of capitalist system Refers to the phenomenon of cyclical booms and depressions There are wave-like fluctuations in aggregate employment, income output and price level.

 A trade cycle is composed of periods of good trade characterized by rising prices and low unemployment percentages, altering with periods of bad trade characterized by failing prices and high unemployment percentages.

- By J. M. Keynes
A business cycle can be defined as wavelike fluctuations of business activity characterized by recurring phases of expansion and contraction in periods varying from 3 to 4 years.

CHARACTERISTICS OF BUSINESS CYCLES

1.Recurring fluctuations 2.Period of business cycle is longer than a year 3.Presence of alternating forces of expansion and contraction 4. Phenomenon of the crises

 The Short Kitchin Cycle

The Long Jugler Cycle

The Very Long Kondratieff Cycle Building Cycles

Kuznets Cycle

 Every business cycle has the critical mark-off points of peak and trough. From trough to peak there is the expansion phase and from peak to trough the contraction phase.
The upper turning point located at the peak marks the beginning of recession while the

lower turning point located at the trough is the venue of revival.

Typically a business cycle has 4 phases :

1. Expansion or Prosperity or the Upswing 2. Recession or Upper-Turning Point

3. Contraction or Depression or Downswing

4. Revival or Recovery or Lower turning point

EXPANSION
Begins from an equlibrium position under the stimulus of forces which creates expectations of rising profits which in turn induce entrepreneurs to increase the scope of their activities.

Prices rise but wages, salaries, interest rates, rentals and taxes do not rise in proportion to the rise in prices. The gap between prices and cost increases the margin of profit.

Characteristics of expansion phase

Demand for consumer goods and production

rises Liberal bank credit Investment increases More profits Rise in price Demand, output, employment are at a high level

RECESSION
Recession starts when there is a downward descends from the peak which is of a short

duration.
It marks the turning period during which the

forces that make for contraction finally win over the forces of expansion.

Characteristics of recession phase

Fall in income or output

Increase in unemployment
Strain in the banking system Fall in prices

Liquidation in the stock market

Decline in profits

Example
2008-2009 Recession The worst recession since the Depression. The economy shrank in five quarters. Two quarters shrank more than 5%. The recession ended in Q3 2009, when GDP turned positive, thanks to economic structure spending. The recession was also the longest since the Depression, lasting 18 months.
The recession was caused by the Subprime mortgage crises, which then led to a global banking credit crises.

DEPRESSION
Recession leads to depression when there is a general decline in economic activity. There is considerable reduction in the production of goods and services, employment, income, demand and prices. The general decline in economic activity leads to a fall in bank deposits. Credit expansion stops because the business community is not willing to borrow. Bank rate

falls considerably.

Characteristics of depression phase

Mass unemployment

Fall in prices, profits, wages, interest rate, consumption, expenditure, investment, bank deposits, loans Factory closedown
Fall in profits

RECOVERY
It starts from a situation when depression has lasted from some time and revival phase or the

lower-turning point starts.

Suppose the semi-durable goods wear out

which necessitate their replacement in the economy. It leads to increased demand. To meet this increased demand, investment and employment increase.

Characteristics of recovery phase

Increase in investments

Increase in employment and demand for products

Increase in output and profits

Expansion in bank credit

Business expectations improve

FACTORS SHAPING BUSINESS CYCLES

 Volatility of investment Spending Momentum Technology Innovations Variation in Inventory Fluctuation in Government Spending Politically Generated Business Cycles Fluctuations in Imports and Exports

METHODS TO CONTROL TRADE CYCLES

1. Monetary cycle Credit creation Credit control

2. Fiscal policy Taxation policy Public expenditure Public debt