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Thursday, 23 August 2018

Phases of Trade Cycle

Phases of a Trade Cycle


It is a stage of trade cycle when economy is caught in very low level equilibrium trap. The capacity of economy is underutilized due to deficiency of demand. A strong factor behind deficient demand may be supply of money in the economy. When supply of money in the economy is low there is deficient demand. Due to deficient demand producers are resorted to produce less and further they draw their investment.  Due to reduction of investment there is low level of production, increased unemployment and hence reduce income level in the economy.  Low income of level causes deficient demand and further llow production. This cycle continues and economy caught trapped in this trap. To come out from this trap, economy faces so many difficulties . It may take numbers of years for new adjustment.


Depression state remains no longer. Things change and rays of hope appear. Depression also inherits reason for recovery. Wages are low and adequate labor is available in the state of depression. Factor of production are available at cheap rate causing low cost of production. Some entrepreneurs come out and take risk and startup new production units because of low cost of production. This step taken by businessmen also helps allied industries. Now investment starts to increase which increase the level of output in the economy. More income generates and more is demanded. Economy starts to recover.


Recovery is started in the economy due to risk taking businessmen. Investment in one industry leads to increase in investment in another industry. Output level increases, more income generates and demand starts  to rise.

End of Boom

A stage comes when all idle factors of production are employed. Excess demand for factors of production rise their prices so cost of production starts to rise. Price of goods and services starts to inflate. Slowly profit level is reduced and disappears at a stage. Now boom is at end.


After the end of boom, economy slips into stagnation. Producers stop their further investment in capital goods i.e. plant and machinery, equipment etc.  Banks recall for repayment. Stock with producers accumulates. The crisis for liquidity arises. This accentuates the depression.


The crisis period suffers businessmen. Their commitments are liquidated somehow and business enters into stage of depression.

According to Mitchell’s thought we can mark four distinct faces of a trade cycle, viz., Expansion ( upward movement), recession, contraction( downward movement) and recovery. The figure below represent these four phases.
Phases of trade cycle

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