Business Cycle (Trade Cycle) – By lunotes.in
🔷 Definition
➡ A business cycle (also called trade cycle) is the wave-like fluctuation in a nation’s aggregate economic activity.
➡ It consists of alternating periods of expansion (growth) and contraction (decline), which occur repeatedly but not at fixed intervals.
🧠 Keynes’s Definition:
"A trade cycle is composed of periods of good trade characterized by rising prices and low unemployment, alternating with periods of bad trade characterized by falling prices and high unemployment."
— J.M. Keynes
📌 Key Features of Trade Cycle
✔ Wavelike Movement
↳ Economic activity rises and falls like waves.
✔ Not Regular but Recurrent
↳ Cycles occur again and again, though not at regular time intervals.
✔ Multiple Phases
↳ Prosperity → Recession → Depression → Recovery
✔ Types of Cycles
↳ 🔹 Primary (4–8+ years)
↳ 🔹 Minor (3–4 years)
✔ Duration
↳ Usually lasts between 2 to 12 years.
✔ Affects All Sectors
↳ Output, employment, investment, prices, interest rates – all fluctuate.
✔ Cumulative Effect
↳ Growth or decline intensifies over time.
✔ Creates Uncertainty
↳ Income from business is unstable, making planning difficult.
✔ Global Impact
↳ Trade cycles can affect multiple countries (e.g., 1930s Great Depression).
Phases of Business Cycle
🟢 1. Expansion (Boom or Prosperity)
✅ The most favorable phase of the economy.
🎯 Every country aims to reach and sustain this phase.
➡️ High production and income
➡️ Full employment achieved
➡️ Prices and wages rise
➡️ Businesses earn high profits
➡️ More bank loans and credit availability
➡️ Increased consumption and investment
➡️ Optimism in the economy
➡️ ROI increases (but slower than profit)
🔻 Initial signs of slowdown begin here (e.g. inflation, resource shortages)
🟠 2. Recession
🔺 Begins when the expansion slows down
➡️ Rising costs due to shortages
➡️ Declining profits lead some firms to shut down
➡️ Fall in investment → fall in income → fall in employment (🔄 reverse multiplier effect)
📉 Income & output fall
📉 Unemployment rises
📉 Prices and wages start falling
📉 Demand for goods declines
📉 Credit borrowing reduces
📉 Consumer confidence falls
🔴 3. Depression
🚨 The lowest point in the cycle — economic activities nearly halt
➡️ Very low income and output
➡️ Massive unemployment
➡️ Sharp fall in prices and profits
➡️ Investment and credit demand drop drastically
➡️ Businesses stop replacing old machinery
➡️ Widespread pessimism in the economy
But eventually, some factors bring an end to this phase...
🟡 4. Recovery
🌱 Turning point where the economy starts bouncing back
➡️ New investments begin (e.g. replacing old machines)
➡️ Income & output start rising
➡️ Employment improves
➡️ Demand increases
➡️ Prices and profits rise
➡️ Optimism returns
➡️ Credit demand picks up again
💡 Recovery becomes self-sustaining if the revival spreads throughout the economy.
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