Concepts, Causes, Control

Trade cycle implies ups and downs or fluctuations in business/economic activity

Trade cycle is a wave like movement

Trade cycles are recurrent in nature

Prosperity or Boom Recession or Decline Depression Recovery

High level of output High level of demand High level of employment High level of income High level of efficiency of capital Price inflation Rising interest rates Expansion of bank credit

Liquidation in stock market Businessman and investors loose

confidence Investment falls Production of capital goods fall Credit supply falls Businesses closed, workers retrenched Unemployment rises Income falls Demand reduces Prices and profits decline

Reduction in volume of output and trade

Large scale unemployment Very low demand and expenditure Price deflation Low national income Low interest rates Decline in productivity and investment Reduction in bank credit

Demand for consumption goods increases Demand for capital goods increases Investment increases Capital stock increases Rise in employment Rise in output Rise in income Demand increases Prices increase Profits increase

Monetary Theory (R.G Hawtrey): trade cycles are caused by fluctuations in money supply

Under -Consumption Theory or Over-Saving) Theory (Malthus, Sismondi, Marx, Hobson): trade cycles are caused due to excessive savings and investment by the high income group

Psychological Theory (J.S Mill, Beveridge, Pigou): trade cycles occur due to the waves of “optimism” and “pessimism” in business community

Innovation Theory (J.A Schumpeter): establishes that “innovations” (application of inventions) as the causes of trade cycles

Keynes’s MEC Theory : trade cycle occurs due to fluctuations in marginal efficiency of capital

Hick’s Theory : trade cycle occurs due to the interplay of the “multiplier” and the “accelerator”

Monetary Policy Fiscal Policy (Keynes and Hansen) Price Control (proposed by Irving Fisher) Unemployment Insurance