Trade Cycles

Meaning of Trade Cycle

According to Prof. J. M. Keynes, A trade cycle is
composed periods of good trade characterized by rising
prices and low unemployment percentage with periods of
bad trade characterized by falling prices and high
unemployment percentage. We should never assume
that economic growth or development is a continuous
process; there are upward swings in business and also
on the other hand downward swings. The continuous
repetition of upward swings and downward swings is
known as trade or business cycle. The trade cycle simply
means the whole course of trade which passes through
all phases of prosperity and adversity.
A noteworthy feature about these fluctuations in
economic activity is that they are recurrent and have
been occurring periodically in a more or less regular
fashion. Therefore, these fluctuations have been called
trade cycles. It should be noted that calling these
fluctuations as cycles mean they are periodic and occur
regularly, though perfect regularity has not been
observed.
The duration of a business cycle has not been of the
same length; it has varied from a minimum of two years
to a maximum of twelve years, though in the past it was
often assumed that fluctuations of output and other
economic indicators around the trend showed repetitive
and regular pattern of alternating periods of expansion
and contraction.
The bad phase of the trade cycle is a very costly affair, as well as an
obstacle in the progress of the economy. In this phase the prices of
the product go down, unemployment level increases and the amount
of trade also decreases, as Prof. Crowther has discussed it as, one
the one hand, there is the misery and shame of unemployment with
all the individual poverty and social disturbance that it may create.
On the other hand, there is a loss of wealth represented by so much
wasted and idle labour and capital.

Because of the downward swings of trade cycle, the businessmen
fells a lot of strain and stress, he is also not able to meet his
commitments, profit of the business men decreases because of the
decrease in price. According to Prof. Adolph Wagner, Crisis imply
the overwhelming and simultaneous occurrence of inability on the
part of independent entrepreneurs to pay their debts. Prof. J. S. Mill
has also discussed this phase of trade cycle, he has described it
as, there is said to be a commercial crisis when a great number of
merchants have or apprehend they have a difficulty in meeting their
engagement. It is a commercial crisis when only merchants are
involved in a difficulty. But when it is accentuated and leads to bank
failure it is called financial crisis.
Prof. J. M. Keynes has defined the term Cyclical movement in trade
cycle in his famous book, The General Theory of Employment,
Interest and Money as, By a cyclical movement we mean that as
system progress in, e.g., the upward direction, the forces propelling
it upward at first gather force and have a cumulative effect on one
another but gradually lose their strength until at a certain point they
tend to be replaced by forces operating in the opposite direction;
which in turn gather force for a time and accentuate one another
until they too, having reached their maximum development, wane
and give place to their opposite force. We do not, however, merely
mean by a cyclical movement that upward and downward
tendencies once started, do not persists forever in the same
direction but are ultimately reversed. We also mean that there is
some recognizable degree of regularity in the time sequence and
duration of the upward and downward movements.
The phases of trade cycle can be divided into four parts,
(a) Expansion, (b) Peak, (c) Contraction and, (d) Trough.
It is clear from the above figure that when the business is
in the condition on trough (in simple words depression),
it is the first phase of trade cycle. Because of some
reasons business began to improve and the condition of
trough turns into the condition of expansion. With the
help of expansion business reaches at its top, that point
is known as Peak. After reaching the peak, contraction
starts. And it continues to the point of trough. This cycle
of good business and bad business is known as trade
cycle. Prof. Haberler has also divided the business cycle
into four parts, (a) Upswing, (b) Upper turning point, (c)
Downswing, and (d) lower turning point. Now we shall
discuss the four phases of trade cycle in detail.
Trough
It should be considered as a limit, at which level an economy can
fall, it is the extreme condition of depression. An employed person
in this situation should feel him lucky, it can also be considered as
the worst condition of business. In this phase the employment
level decreased up to a maximum level, the earning of the
employees also decreases. The reason is, the prices of the
commodities decreases, as a result profit also decreases. The
value of the money increases, but on the other hand purchasing
power of the people decreases fastly. In this situation producers
do not want to do more production, no matter they are producing
consumer goods or capital goods. The new equilibrium exists with
a low level of prices, costs and profits, and it can remains for a
couple of years.
Expansion
In the phase of expansion, both the employment level
and the output level increases, up to the full
employment level. In this phase people do the
maximum utilization of the available resources to get
the maximum output. In this phase the price goes up
along with the employment level. The earning of the
employees increases, as well as the purchasing power
is also increases. In this condition producer wants to
increase the amount of output by employing more and
more factors of production. In this phase with the
growing income people do more investment and they
also increase their demand for consumer goods.
Contraction
At the time of contraction the national income
as well as the employment level reduced. As a
result the level of investment and the demand
of the goods and the services decreased, it is
also caused to the fall in the rate of interest,
and further it leads to the increase in money
holding. It hits the consumer and the capital
goods industries very badly. And ultimately
contraction leads to the phase of trough.
Peak
This phase of trade cycle is also known as boom.
Recovery once started gathers momentum. The
slender stream of recovery, when it has started
flowing, is strengthened by numerous tributaries on its
way. The revival of investment in one industry leads to
the revival of others. With the general revival of
demand, price show an upward trend. The
businessmens income takes a forward jump while
wages, interest and other costs lag behind. Profit
margins are thus widened. Optimism grows and
spreads far and wide. This phase of trade is known as
peak or boom.
Features of Trade Cycle
Various trade cycles differ in duration and intensity they
have some common features which we can explain as,
It has been found that trade cycles occur periodically at
fairly regular intervals. The interval is not a precise one
but the degree of regularity is sufficient to demonstrate
the periodicity of a trade cycle. There is a general
consensus of opinion that the cycle takes seven to ten
years nearly to complete itself.
An attack on one part of the business organism is bound
to send a shock to the other parts. If one firm is in grief,
those who deal with it cannot remain unaffected, and
they, in turn, will affect others with whom they may be in
commercial intercourse. Thus, depression passes from
one industry to other.
It has been proved from the studies that the fluctuations occur in the
production process cannot only affects the amount of production but it
also affects the level of employment, consumption, investment and also
the rate of interest and general price level.
An important feature of business cycle is that consumption of non-
durable goods and services does not get affected in a larger amount.
It should be noted that the trade cycles are international in nature,
suppose trade cycle starts in a country specifically in any sector. Firstly it
grabs all the sectors within the economy, after this because of
globalization it can also be affected the different sectors of other nations,
because in todays time period countries do trade frequently with other
countries.
Another important feature of business cycles is that investment and
consumption of durable consumer goods such as cars, houses and
refrigerators are affected most by the cyclical fluctuations.
Control of Trade Cycles
According to various economists; we
cannot avoid trade cycles, we can only
delay them or maximum we can mitigate
their severity. With the help of this we can
divide the measures into two parts, 1.
Preventive measures and, 2. Curative
measures.
Preventive Measures
To avoid the crisis, first we have to diagnose the
problem. In a country like India most of the people
depends upon the agriculture sector. In our country we
have a higher dependency on the monsoon for good
production. If there is no rain, it can be possible that the
trade cycle gets start from this sector. To avoid this we
have to reduce the dependency on rain, by providing
them proper irrigation facilities, like the canals and the
bore wells etc.
The corporate sector should have an ample of
informations to predict the future demand of their
products. Otherwise they can do an over production, that
is very harmful from any point of view. Trade cycles also
grab the pessimist people first, so government should
motivate their people. In the boom period, the companies
may be asked to follow a cautious policy in the
distribution of dividends and to build up reserves.
Curative Measures
The above discussed preventive
measures are not enough to control the
business or trade cycles, in this section we
shall discuss the curative measures to
control the trade cycles. Curative
measures can be divided into two parts,
monetary measures and Fiscal measures.
Monetary Measures
Monetary measures deal with the policy of the central bank and the
working of the commercial banks. It consists the banking and the
credit policy of the banks, monetary policy of the central bank. First
we should discuss the monetary policy of the central bank.
The most important function of the central bank is the credit control.
The credit control means the regulation and control of bank
advances. The central bank must stimulate bank advances, at other
times, the banks lending may assume undesirable proportions or
they may be flowing into undesirable proportions or they may be
flowing into undesirable channels. It is the duty of the central bank to
curb these undesirable tendencies by regulating and controlling
credit creation by banks. Central bank can increase or decrease the
reserve requirement according to the need of the economy. In the
period of depression central bank normally decreases the reserve
requirement, so that the liquidity can be maintained.
When boom conditions are developing, bank rate is raised and thus
credit is contracted with the consequent brake upon the undue
expansion of business activity. On the other hand, in a depression, a
policy of cheap money may be adopted to stimulate business
investment and thus assist recovery.
Obviously, monetary policy has much to commend itself and was,
therefore, rightly regarded, in the early thirties, as the best anti-
cyclical instrument. But there are limitations of the policy relating to
the bank rate and open market operations. Its success will depend
on how far the various members of the banking system are prepared
to accept the lead given by the central bank; how far the banks can
make their borrowers use their credits for purposes for which such
credits have actually been created; further, how far monetary causes
are responsible for the economic fluctuations; and still further, and
most important, whether the business community will adjust their
investment exactly in accordance with the altered rates of interest.
Fiscal Policy
Before discussing fiscal policy as a measure to control trade cycles,
first we should discuss the subject matter of public finance.
In case of public finance, government can do anything. For example
if it has to double the expenditure than it can increase the rate of
taxes, so that the income can be doubled. But in case of private
finance it is not possible; he can increase his income or expenditure
a little bit. But any big change is not possible, neither in income nor
in expenditure.
The subject matter of the public finance can be divided into five
parts,
Public Expenditure
Public Revenue
Public Debt
Financial Administration
Economic stability

Public Expenditure
We can broadly classify trade cycle in to two parts, good business and bad
business. In good business government should decrease the amount of
public expenditure; government can keep the excess revenue as reserve for
the future purposes. On the other hand government should increase the
amount of public expenditure, because in the time period of depression or
bad business, the purchasing power of the people decreases and with the
help of public expenditure government can increase that. Thats the way
government can control the trade cycles.
Public Revenue
Public revenue is also useful in the control of trade cycles. In the time of
depression, government should decrease the rate of taxation and it should
also abolish some taxes. One the other hand they should be increased in
the period of boom. To stimulate business investment during depression,
not only the rates of taxes should be lowered but also more liberal
allowances for depreciation and obsolescence, etc., should be granted.
Public Debt
Public debt is the debt which is taken from the public, in
the period of recession or depression government should
not collect the public debt, instead of this it should
increase the public expenditure. On the other hand in the
period of boom government should increase the amount
of public debt, so that the purchasing power of the
people can be controlled.
International Measures
Along with monetary and fiscal measures, there are
some international measures which can control the trade
cycles like, International production control, international
investment control and international buffer stocks.

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