Meaning and Definition of Trade Cycle in Economics With 4 Examples

Study Material on Trade Cycle in Economics
Study Material on Economics on Business Cycle


Meaning of Trade Cycle in Economics

Meaning of Trade Cycle in Economics – The business cycle refers to fluctuations in economic activities, especially employment, output and income, prices, profits, etc. Different economists have defined it differently. According to Mitchell, “Business cycles are fluctuations in the economic activities of organized communities. The adjective “business” restricts the concept of fluctuating activities that are systematically carried out on a commercial basis.

The term ‘cycle’ in economic designates a fluctuation that does not occur with a certain regularity”. According to Keynes, “The Business Cycle consists of periods of good business characterized by rising prices and low unemployment, alternating with periods of bad business characterized by falling prices and high unemployment”.

Charecterstics of the Trade cycle in Economics:

There are 8 Charecterstics of the Trade cycle in Economics as following:

  1. The business cycle is synchronous. When cyclical fluctuations start in one sector, they spread to other sectors.
  2. In the business cycle, a period of prosperity is followed by a period of depression. So the business cycle is a wave-like movement.
  3. The economic cycle is repetitive and rhythmic; prosperity is followed by depression and vice versa.
  4. The business cycle is cumulative and self-reinforcing. Each phase feeds on itself and creates another movement in the same direction.
  5. The business cycle is asymmetric. The prosperity phase is slow and gradual and the depression phase is fast.
  6. The economic cycle is not periodic. Some business cycles last three or four years, while others last six or eight or more years.
  7. The impact of the business cycle is different. It affects different industries in different ways.
  8. The business cycle is international in nature. Through international trade, booms and depressions in one country are transmitted to other countries.

4 Phases of the Trade Cycle in Economics:

Generally, the Trade cycle in economics consists of four phases – Depression, Recovery, Prosperity and Recession. It is called as DRPR.

1. Depression:

During a depression, the level of economic activity is extremely low. Real income production, employment, prices, profit, etc. are falling. There are idle resources. The price is low, which leads to a decrease in profit, interest and wages. All parts of the people suffer. During this phase, there will be pessimism leading to the closing of business firms.

2. Recovery:

A recovery marks the turning point in the economic cycle from depression to prosperity. In this phase, there is slow growth in output, employment, income and prices. Demand for commodities is rising. There is an increase in investments, bank credits and loans. Pessimism gives way to optimism. The process of revival and renewal is cumulative and leads to prosperity.

3. Prosperity:

It is a state of affairs in which real incomes and employment are high. There are no idle resources. There is no waste of material. There is a rise in wages, prices, profits and interest. The demand for bank loans is growing. There is optimism everywhere. There is a general upward trend in the business community.

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However, these boom conditions cannot last long because expansionary forces are very weak. There are bottlenecks and flaws. There may be shortages of labour, raw materials and other factors of production. Banks can freeze their loans. These conditions lead to recession.

4. Recession:

When entrepreneurs realize their mistakes, they reduce investment, employment and production. Then a decline in employment leads to a decline in income, expenditure, prices and profits. Optimism gives way to pessimism.

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Banks reduce their loans and advances. Business expansion stops. This state of recession ends in depression.

Attributes of four-phase Trade cycle in Economics

Attributes of four-phase Trade cycle in Economics are as follow:

  1. Depression lasts longer than prosperity,
  2. The recovery process begins gradually,
  3. The prosperity phase is characterized by extreme activity in the business world,
  4. The prosperity phase ends abruptly.

Whats is the Teory behind Trade Cycle in Economics

Many theories have been put forward from time to time to explain the phenomenon of business cycles. These theories can be divided into non-monetary and monetary theories.

What is Definition of Trade cycle in Economics?

The wave movement of fluctuations in general business activity, spread over a number of years, is called a business cycle. These fluctuations result in changes in the level of national income and employment and create not only economic but also social and political problems.

Example of a Trade cycle in Economics?

The economic business cycle shows how economic growth can fluctuate in different phases, for example: boom (which is a period of high economic growth that can cause inflation), peak (peak of the business cycle where growth can decline).

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Purpose of the Trade cycle in Economics?

The business business cycle, or simply the “business cycle,” is the cycle that countries go through when collective economic activity ebbs and flows. This affects employment, inflation, economic output and consumer spending.

Types of Trade in Economics?

There are 6 types of Trade in Economics as mentioned below:

  • Home business.
  • Wholesale.
  • Retail.
  • Foreign trade.
  • Import trade.
  • Export trade.

What is a short-term Trade cycle in Economics?

Short-term trading refers to those trading strategies in the stock market or the futures market in which the time between entry and exit is in the range of several days to weeks. There are two main schools of thought: swing trading and trend following.

What is closing the Trade cycle in Economics?

Conclusion. In a business cycle, “expansion” is measured from the trough (or troughs) of an earlier business cycle to the peak of the current cycle. A recession is measured from the peak of the current cycle to the trough of the next cycle.

How long is the Trade cycle in Economics?

The length of business cycles varies depending on the state of the economy. The average length of an expansion is just under five years, and the average length of a contraction is 11 months. The total length of the cycle lasts five and a half years on average.

What are the 3 importances of trade?

Trade is essential to America’s prosperity—it supports economic growth, fosters good job opportunities at home, raises living standards, and helps Americans provide affordable goods and services for their families.

How can the Trade cycle be controlled?

The measures are: 1. Price adjustment policy 2. Price control, price support and allocation 3. Labor market organization and management.

What is the Peak point of the Trade cycle?

A peak is the highest point of a business cycle and is followed by a contraction and eventual trough.

Who proposed the Trade cycle?

This theory comes from the work of Raymond Vernon, who described the development of international trade in terms of the product life cycle – the period of time during which a product circulates in the market.

What are the 5 types of stores?

There are five main types of trading available to technical traders:

  1. Scalping
  2. Day trading
  3. Momentum trading
  4. Swing trading
  5. Position trading
  6. Mastering. This one style of trading is very important, but a trader must also master others.

What is prosperity in the business cycle?

Prosperity in Trade Cycle: this phase is also known as prosperity or peak. During this phase, the growth level is at its maximum. Income, demand, investment and profits are high. Recession: this phase comes after the boom phase, when economic activities have reached their highest level, followed by a slowdown.

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What is a depression in the Trade cycle?

A depression is characterized as a dramatic decline in economic activity coupled with a sharp decline in growth, employment, and production. Depressions are often identified as recessions lasting more than three years or resulting in a decline in annual GDP of at least 10%.

What is Keynesian Trade cycle theory?

According to Keynes, the business cycle is caused by changes in the rate of investment caused by fluctuations in the marginal efficiency of capital. The term “marginal efficiency of capital” refers to expected profits from new investments. Business activity depends on the expectation of profit.

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