Question

Describe the phases of Trade cycle.

Answer 1

Phases of Trade Cycle
The four different phases of the trade cycle are referred to as

1. Boom
2. Recession
3. Depression and
4. Recovery. These are illustrated in the figure:

Phases of Trade Cycle:

1. Boom or Prosperity Phase:
The full employment and the movement of the economy beyond full employment is characterized as a boom period.

1. During this period, there is hectic activity in the economy.
2. Money wages rise, profits increase and interest rates go up.
3. The demand for bank credit increases and there is all-around optimism.

2. Recession:

1. The turning point from the boom condition is called recession.
2. This happens at a higher rate than what was earlier.
3. Generally, the failure of a company or bank bursts the boom and brings a phase of recession.
4. Investments are drastically reduced, production comes down and income and profits decline.
5. There is panic in the stock market and business activities show signs of dullness.
6. The liquidity preference of the people rises and the money market becomes tight.

3. Depression:

1. During the depression, the level of economic activity becomes extremely low.
2. Firms incur losses and closure of business become a common feature and the ultimate result is unemployment.
3. Interest prices, profits, and wages are low. The agricultural class and wage earners would be the worst hit.
4. Banking institutions will be reluctant to advance loans to businessmen.
5. Depression is the worst phase of the business cycle.
6. The extreme point of depression is called a “trough” because it is a deep point in the business cycle.

4. Recovery:

1. After a period of depression, recovery sets in.
2. This is the turning point from depression to revival towards an upswing.
3. It begins with the revival of demand for capital goods.
4. Autonomous investments boost the activity.
5. The demand slowly picks up and in due course, the activity is directed towards the upswing with more production, profit, income, wages, and employment.
6. Recovery may be initiated by innovation or investment