Describe the phases of Trade cycle.
Phases of Trade Cycle
The four different phases of the trade cycle are referred to as
- Depression and
- Recovery. These are illustrated in the figure:
Phases of Trade Cycle:
1. Boom or Prosperity Phase:
The full employment and the movement of the economy beyond full employment is characterized as a boom period.
- During this period, there is hectic activity in the economy.
- Money wages rise, profits increase and interest rates go up.
- The demand for bank credit increases and there is all-around optimism.
- The turning point from the boom condition is called recession.
- This happens at a higher rate than what was earlier.
- Generally, the failure of a company or bank bursts the boom and brings a phase of recession.
- Investments are drastically reduced, production comes down and income and profits decline.
- There is panic in the stock market and business activities show signs of dullness.
- The liquidity preference of the people rises and the money market becomes tight.
- During the depression, the level of economic activity becomes extremely low.
- Firms incur losses and closure of business become a common feature and the ultimate result is unemployment.
- Interest prices, profits, and wages are low. The agricultural class and wage earners would be the worst hit.
- Banking institutions will be reluctant to advance loans to businessmen.
- Depression is the worst phase of the business cycle.
- The extreme point of depression is called a “trough” because it is a deep point in the business cycle.
- After a period of depression, recovery sets in.
- This is the turning point from depression to revival towards an upswing.
- It begins with the revival of demand for capital goods.
- Autonomous investments boost the activity.
- The demand slowly picks up and in due course, the activity is directed towards the upswing with more production, profit, income, wages, and employment.
- Recovery may be initiated by innovation or investment
Concept: Trade Cycle
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