Definition of Business Cycle or Trade Cycle The term business cycle (or economic cycle) refers to economy-wide fluctuations

in production, trade and economic activity in general over several months or years in an economy organized on free-enterprise principles. These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth (an expansion or boom), and periods of relative stagnation or decline (a contraction or recession). Different author has given different definition of the trade cycle some of them are A trade cycle is composed of good trade characterized by rising prices and low unemployment percentages, alternating with periods of bad trade characterized by falling prices and high unemployment percentages. Keyenes The business cycle represents wavelike fluctuations in the level of business activity from the equilibrium or trend line. Schumpeter Business cycles are usually measured by considering the growth rate of real gross domestic product. Despite being termed cycles, these fluctuations in economic activity do not follow a mechanical or predictable periodic pattern. In the study of economic activity, four types of economic changes or fluctuations can be distinguished: Trends Seasonal Irregular or random Cyclical Trend Trend is the overall directional movement in the economy over an extended period of time, 30-50 years. A line representing the trend usually shows an upward or downward movement. The trend shows average growth or decline over a period of time. Seasonal Variation These are fluctuations in economic activity during a given period, usually a year. Changes in agricultural production and employment are caused by weather. Weather also causes change in the production of construction, coal and dockyard workers. Customs and convention may encourage more purchases in Ramadan, Holi and other religious and culture activities. Such fluctuations are caused by artificial and conventional forces. Irregular Fluctuation These are changes in business activity resulting from some unexpected or unusual event. Such factors are floods, drought, earth-quake, locust invasion, wars, pestilence, fire, strikes, political disturbances, a change in the currency, a rapid increase in population or the passage of certain types of legislationall those which can affect the economy as a whole. Cyclical Fluctuations These are fluctuations in the level of business activity that would come about even though there were not trend, seasonal or irregular factors. (Cycles are caused by forces within economy itself). The economy operates in such a way that it tends to accelerate at

times, but in so doing it builds up the forces which will eventually bring about a deceleration in the economy. Since the seasonal and cyclical fluctuations occur periodically they are said to be recurring rhythmic changes. Seasonal fluctuations have a fixed regularity, while the cyclic occur irregularly. Types of Business Cycles The capitalist economy has passed through numerous business cycles. Following are the types of business cycle or types of trade cycle Major cycles Minor cycles Long-wave cycle Major Cycles These are wide oscillations of business activity and are characterized by serious depression; seven different business cycles were seen during 1870-1937. Minor Cycles These are of relatively mild intensity characterized by downward movement. Between 1947.1983 rapid economic growth was four times interrupted by minor, mild downswing. (1980-83 recession threatening end into a slump as some economists say). Long Waves Long waves business cycles or trade cycles are of 50 to 60 years duration. The upswing period of the long-range cycle can contain several minor and even major cycles. The primary element in long wave business cycle is the price movement. Characteristics of Business Cycle or Trade Cycle Following are the important characteristics of business cycle. Aggregate economic activity Fluctuations in the aggregate economic activity represents business cycle. If there are downswing and upswing trends in a particular sector of the economy, they will not present trade cycle. Pervasive in effects Whenever an expansion or contraction takes place in any sector of the economy it represents to all other sectors of the economy like an epidemic e.g. if investment expands it results in an increase in national income, employment level etc. Rhythmic changes It means, if there is an expansion in any sector of the economy, it will affect all other sectors which will also move upward in a rhythmic manner. Hence, all the economic activities move together in one direction. Thus, there is no possibility to have an expansion in one sector of the economy and simultaneously a contraction in another sector of the economy. No specific period The difference phases of business cycle are not of the same duration e.g. a phase of expansion could be of eight years or more and phase of depression may be two years. Similarly duration of each trade cycle differs from the other. Not similar inform, duration & amplitude International in Character The trade cycle do not confined to a single country and they spread to all countries of the world through international trade. In 1930 a great depression was noticed with affect many counties.

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Business Cycle occurs due to numbers of factors and causes, these causes are classified into: 1. External Causes & Factors of Business Cycle 2. Internal Causes & Factors of Business Cycle External Causes and Factors of Business Cycle Wars. In war days all the available resources are utilized for the production of weapons which greatly affect the product of both capital and consumer goods. This fall in production decreases income, profits which further create unemployment. These create contraction in the economic activity. Post war Period. In the post war period the level of consumption and investment goes upward. Both the government and individuals involve the construction (houses, roads, bridges etc). All these activities increases the effective due to which the economic variables, output, income and employment goes upward. Scientific Development. Another cause of business cycle is scientific development. Every day new products come to the markets like mobile phone, laptops etc. These products require huge amount of investment through which new technology of production is adopted. All this increases income, employment and profit etc. and plays an important part in the revival of economy. Gold Discoveries. The discoveries of gold and mines stimulate the volume of international trade and help in adjusting trade deficit, loans etc. the rising income lead to expansion in economic activity. Surplus, Exports and Foreign Aid. Surplus, exports and foreign aid raises the level of consumption and investment spending which helps in increasing output, income and employment level. Weather. Weather is one of the causes of business cycle. It is an important factor which can cause economic activities. If in any year, weather is good the output of agricultural sector will goes upward. Population Growth Rate. Population growth rate is one the factors of business cycle. If the population growth rate is higher than the economic growth rate, income level and consumption expenditure and savings will be low. Internal Causes and Factors of Business Cycle Internal causes of business cycle are those, which are built in within economic system. These are the internal factors of business cycle: Psychological Factors. According to Pigou business cycle appears because of the optimistic and pessimistic mood of the entrepreneur. When entrepreneurs are in optimistic about future market conditions they take up investment. Here the expanses phase of business cycle starts which ultimately ends in a boom. On the contrary, the pessimism reduces investment, production, employment and shifts to downward trend in business activity. Money Supply. Hawtrey and Friendman relate trade cycle to fluctuation in money and credit supply. If there is expansion in money and credit supply, there will be raise in economic activity. If there is contraction there will be down fall in economic activity.

Over Investment. Hayek relates business cycle to variation in capital goods industries. Excessive investment in capital goods industries brings upswing and downswing when there is a fall in investment. Marginal Efficiency of Capital (MEC). According to Keynes changes in the rate of marginal efficiency of capital are responsible for business cycle. When the rate of marginal efficiency of capital gets higher the expansion phase of trade cycle commences. There is a contraction phase when the rate of marginal efficiency of capital is lower. Phases of Business Cycle All the four business cycle phases are cyclical but there is no explicit period or intervals for these business cycle occurrences. Below are the four business cycle phases or trade cycle phase. 1. Depression Phase 2. Revival Phase 3. Propensity Phase 4. Recession Phase 1. Depression Phase Under the depression phase both economic activities and national income fall and the cost is comparatively higher than price. Level of profit decreases and there is a reduction in the consumer and capital goods. Graph of bank credits goes downward. In simple word during depression the level income, employment, consumption, prices comes to the lowest level. Reasons for depression INTRO- It marks the end of pessimism and beginning of optimism and the process begins in the labour market, phase of trough is reached Fall in the stock prices comes to end Optimism takes the way in the stock market Investment increases Employment gradually increases Recovery in production and wage income Consumption of consumer and capital goods increases 2. Recovery & Revival Phase During depression phase economy slowly moves towards recovery. Slowly and steadily the levels of income, employment, consumption and prices goes upward in revival phase of trade cycle. Those consumers delayed their consumption in the hope of decrease in prices, now come back to consumption. As the consumption starts in the economy businesses becomes profitable. There is noticeable re-employment in the economy. Reasons for recovery Employment is generated in construction sector Wage income further increases Consumption expenditure increases Factors of production are being fully employed Consumption of durable goods and variety items goes up

3. Boom & Prosperity Phase The prosperity stage is the highest level of revival phase of trade cycle. In this stage demand, productivity, employment, people income and consumption are at the top. When there is a raise in profits, businesses are able to get loans from financial institutions. As the demand increased for bank credits and loans the rate of interest reaches the highest floor, which leads to sharp hike in the prices. Reasons for expansion Rise in national output Rise in consumer & capital expenditure Rise In the price of raw materials and finished goods Rise in the level of employment 4. Contraction & Recession Phase Recession phase is not the only phase of business cycle; recession is a change point where the forces set for recession take over the forces of extension. In the previous stage banks were engaged in advances, however in recession stages now have shifted towards loans recovery. The cost begins increase than the prices due to employment of less efficient factors of production with higher cost. As a result there a gradual disappear in profits. There is an uncertainty in the economy which leads to cut down the investment, production and employment. Reasons for recession Due to Discrepancy between demand and supply Which Leads to decline in investment Decline in income Decline in consumption and production Employment rate falls Demand for consumer and capital goods decreases Borrowings decreases Unemployment increases

Following are the main measure which can be suggested for the effective control of business cycle fluctuation. 1. Monetary Policy 2. Fiscal Policy 3. State Control of Private Investment 4. International Measures to Control of Business Cycle Fluctuation 5. Reorganization of Economic System 1. Monetary Policy A Control of Business Cycle Monetary policy as measure to control business cycle fluctuation refers to all those measures which are taken with a view to control money and credit supply in the country. When we are in the state of full employment and we are facing inflation, a deflationary policy may be adopted. The central bank can reduced the quantity of money in circulation. The bank can adopt different measures for this purpose, like increase in the bank rate, selling of securities in the market, increasing the reserve ratio of the member banks etc. On the other hand, in case of deflation the central bank can adopt inflationary monetary policy by lowering the bank rates or purchase of securities. Monetary policy has achieved a very limited success in the past, because central bank has not full power over the supply of money and credit in the country. Moreover, the quantity of money has failed during the world depression of 1930s. 2. Fiscal Policy Measure to Control of Business Cycle Fluctuation Fiscal policy as measure to control business cycle fluctuation nowadays is considered to be a powerful anti-cycle weapon in the hands of the government. Fiscal policy involves the process of shaping the public finance (income and expenditure) with a view of reduce fluctuations in the business cycle and attainment of full employment without inflation. In case of inflation the governments reduces the public work programs, imposing heavy taxes on business profits to discourage private investment, reduces purchasers power, taking loans from the people, prepares surplus budget to reduce public debt. All these fiscal measures greatly help in reducing the inflationary trend in the economy. If the economy facing depression, the government increases it expenditure on public works programs like construction of new canals, new roads, buildings etc. Increase in government expenditure, income, employment, profit and consumption of the people. In order to encourage private investment the government reduces taxes on profit. The government also prepares deficit budget and the deficit is met by loans. All these fiscal measures to control business cycle sets in upswing in the economy. 3. State Control of Private Investment Some economists have suggested that if a government takes control of private investment is a tool to control of business cycle fluctuations can be controlled within the limits. The other economists, who disagree with the above view state that if a government takes control of private investment, private investment will be discouraged. Low investment will reduce employment and income. J.M Keynes is of the view that if we adopt the middle way we can get control of business cycle fluctuation.

4. International Measures Control of Business Cycle Today, every country has trade relations with the rest of the world. If there is inflation or deflation in one country, it can be easily carried to other countries. The example of great depression can be given. Business cycle is an international phenomenon and it should be tackled on international level. Different measures to control business cycle fluctuations have been suggested by some well-known economists these are: Control of International Production International Bill Stock Control International Investment Control 5. Reorganization of Economic System Some economists suggest that there should be complete reorganization of the whole economic system to control of business cycle fluctuation. The capitalistic system of production should be replaced by the socialistic system of production. In socialistic economy, there are few chances of cyclic fluctuations. In 1930, when all capitalist countries of the world were suffering from depression, it was only socialist countries which were free from such crisis. Theory of the business cycle/ trade cycle
1) 2) 3) 4) 5) 6) 7) Climatic or Sunspot theory The psychological theory Innovation theory Monetary theory Over-investment theory Over-production theory Keynes theory

A. Sunspot theory
Offered by Mr . Jevan. Trade cycles are caused by sun spots. Sunspots appear on the face of the sun. Almost at regular intervals of 10.4 years.

SPOT APPEARS SUN EMITS LESS HEAT CROP YIELD WILL BE LOW INCOME OF FARMER FALLS LESS PURCHASING POWER Drawback Based on only agro based theory Good or bad crop can only be one factor of depression or expansion but they cannot account for all the features The trade cycle occur at regular intervals of 10.4 years, while length of the trade cycle is 7 to 8 years

B. The psychological theory

Given by professor PIGOU Trade cycles are caused by the optimistic and pessimistic attitude of the businessman OPTIMISTIC Brisk businessman earn high profits and expands the investment and production Overestimate the future demand of goods and increase the production PESSIMISTIC businessman puts less investment and less production Rate of employment and rate of profit decreases Supply exceeds the demand so price falls. Drawbacks Considers only psychological views of businessman Ignore other factors

C. Monetary theory
Takes money supply into consideration Deals with money expansion and contraction Money contraction - demand falls, rate of interest increases- decreased borrowings Money expansion demand rises, rate of interest decreases- increased borrowings Criticism Trade cycle is not purely monetary phenomenon It is worldwide phenomenon

D. Innovation theory

Innovation can be of various types 1-new product 2-new market 3-niche market 4-new technology 5-new source of raw material Innovation leads to more production Ultimately increase in aggregate demand Further increase in income of business Drawback of innovation theory The full employment assumption is unrealistic. Bank is not the only source of finance for every innovation in business. Many times the profits are ploughed back to finance innovations. Innovation cannot be the sole cause of business cycle.

E. Over investment theory

Natural rate of interest is determined at a point where savings(voluntary)= investment if market ROI < natural ROI then, businessman demands more investment, capital, more production, more income, more labour, more demand If market ROI> natural ROI, then reduction in capital demanded, less prod. , less labour, less income , less demand If economic system is capitalism, all the entrepreneurs wants to produce goods which are profit making Leads to high competition because of entry of new firms Profit making possibility : high Due to over production activity, initially everything increases Thereafter as a result firms starts withdrawing resulting in Less demand Less income Less production Less labour

F. Keynes theory

1) concept of marginal efficiency of capital(MEC) MEC:- rate where price of capital=yield from capital Example: buying of machinery- how much return will we get in the coming years 2) Says that depression & unemployment is there because there is decrease in the aggregative demand. Now aggregative demand can be increased: 1. Investment 2.consumption We know in short run consumption cannot be increased.but so can investment. SO, by controlling the investment, depression & unemployment can be reduced in the short run. 3) Yield depends on the expectations (psychology):: yield is the only factor affecting MEC and yield is affected by the psychology of the entrepreneur. Possible causes of trade cycle MEC & efficiency cannot be the only reasons Therefore al the theories have an equal impact on the trade cycle.