Define the term Trade Cycle & its Different Phases

Trade Cycle & its Different Phases




History tells us about the ups and down in Business cycle. In which some time good trade of the business that shows the Profit period of it, and some time bad trade of the business that shows the loss period of it. Such good or bad Trade is called the business Cycle or Trade cycle. We can say it the Periodic fluctuations in economic activities of a country are called business cycle.




By Prof. Haberler:


“Business cycle in the general sense may be defined as an alternation of period of prosperity and depression of good and bad Trade.”



By Hansen:


“Business cycle is the fluctuation in the employment:

output and prices.”


By M.Keynes:


“A trade cycle is composed of period of good trade characterized by rising prices a d low unemployment percentage alternating with period of bad trade characterized by falling prices and high unemployment perce tage.”


Features of Trade Cycle


1. Regular Intervals


The main fe tures of Trade cycle is regular intervals of its different phases. Every Boom is followed by depression and in turn depression s followed by boom. Every phase takes two to three years to complete. The total time period of a business cycle is usually 8 to 12 years.



2. Slow Recovery


The movement of business activity is slow from depression to Boom.

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3. Rapid down falling


There is rapid down falling of the business activity form boom to depression


4. World wide


A trade cycle is not the problem of one country. It is world wide in nature.


5. Similar application


When each of one phase is starts then it effect all the industries, like if there is Boom then all industries will reflect the same. On the other hand if their is depression phase, the same characteristics can be seen in all sectors of the economy.


6. Employment level


The employment level falls with the contraction of business activity and rises with the expansion of business activities.



7. Capita goods


The capital goods industries are the first to be depressed and first to be recovered.



8. Rise and fall in economic variables


The economic variables i.e. income, output, profit, wages and prices rise in boom and fall in depr ssion.


Phases of Trade Cycle

There are four phases of Trade Cycle as under

1. Depression

2. Recovery

3. Boom

4. Recession



Depression/ Contraction


A period of trade in which business experienced with low profit ratio, as well as suffering loss, with low productivity and sales. In simple words we can say it’s a period of Bad trade. It’s characterized as under:


2. Low productivity

3. Low national income

4. Low per capita income

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5. Low purchasing power of people.

6. Decrease in average demand

7. Fall in price

8. Low profit margin

9. Insufficient rate of investment

10. Fall in bank credit

11. High rate of interest

12. High unemployment


Recovery or Revival


After the depression has last d for sometime, a ray of hope appears on the business horizon. Businessmen start thinking about their businesses. They decide to repair their industrial units and alert the factors of production. Thus is characterized by:


1. Optimistic approach of businessmen

2. Initiative of investment in consumer and producer goods industries

3. Profit margin re-appears

4. Per capital income is increasing

5. Purchasing power of people is improving

6. Prices show upward trend

7. Ranks started advancing loans by lowering the rate of interest

8. Employment rate is increasing


Boom, Peak


A period of good trade is called boom. We can say it is the end of recovery period.

It’s characterized as under:


1. New investment in all sectors of the economy.

2. Revival in all industries

3. High level of national income.

4. High per capita income.

5. High propensity to consume.

6. High prices

7. Low purchasing power of money

8. High purchasing power of people

9. Credit expansion by the banks

10. High profit margin

11. High employment rate




In this period economy moves from boom to depression. The period of boom does not last forever. In order to increase production in boom, less efficient factors of production are mployed at high cost. Due to increased demand, the production falls short which results in increase in prices.

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It’s characterized as follow


1. Pessimistic demand starts decreasing

2. Aggregate demand starts decreasing

3. National income also starts falling

4. Per capita income is falling

5. Over production takes place

6. Investment st rts decreasing

7. Prices also come down

8. The profit margin decreases

9. Unemployment creates in the economy

10. Banks feels hesitation in advancing loans





No doubt Trade cycle create more fluctuation for the economy. But it’s compulsorily for business. And during its different phases some time business enjoying the period of profit, and some time suffering period of loss.


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