Understanding Trade Cycles- Ups and Downs of the economy

Riding the Waves of Trade cycles  

We often hear people talking about growing unemployment, why do jobs come easily in one season and disappear in another? Understanding these ups and downs isn’t just for economists — it’s for anyone who wants to make smarter decisions in business, investing, or everyday life. Imagine trying to drive a car without knowing when the road might dip or rise. That’s what it’s like navigating the economy without understanding trade cycles. These cycles affect everything — from your job prospects to interest rates and business profits. So, what exactly are they, and why do they keep happening?

Introduction to Trade Cycles

According to Lord Keynes, “ a trade cycle is composed of periods of good trade, characterized by rising prices and low unemployment percentage altering with periods of bad trade, characterized by falling prices and high unemployment percentage.” a trade cycle is composed of periods of good trade, characterized by rising prices and low unemployment percentage altering with periods of bad trade, characterized by falling prices and high unemployment percentage.”

In simple words, every economy, witnesses' boom and depression periodically, depression is characterized by falling production. Falling prices in rise in unemployment and boom is characterized by rising production, rising prices and high and employment percentage. These changes of boom and depression are cyclical in nature. hence these are called business cycles or trade cycles. Therefore, trade cycles are periods of prosperity and depression. 

Types of Trade Cycles 

Prof. Schumpeter has divided trade cycles into three types 

1. Major Cycles- Also known as Juglar cycles 

Duration- 8-12 years  

2. Minor Cycles- Also known as Kitchen cycles 

Duration- 2-5 years

3.Very Long cycles - Also known as Kondratieff Cycles 

Duration- 50-60 years 

Different Phases

* Boom

This phase of trade cycle represents the best phase of prosperity. The aim of every economy is to attain this stage. in this stage production is at peak and factors are put to their optimum use.

1. Production is maximum

2. Level of income is very high

3. Economy reaches full employment

4. Prices are very high

5. Wages, rates of interest, rent and taxes increase but increase in all this is less than the prices, thus real wages do not rise much

6.Profits rise very high

7.Traders and entrepreneurs become optimistic as a result there is more investment

8. Banks pursue liberal credit policy leading to more investment 

9. The process of expansion continues to be cumulative the economy reaches the highest level of production called boom. It is the situation of over full employment and inflation.

* Recession

Under this phase of prosperity, the entrepreneurs make investment in certain ventures which do not prove to be profitable to pessimism and investment shows a sign of decline. Many enterprises or shut down unemployment spreads.

1. There is fall in income and output.

2. Workers are rendered unemployed.

3. Wages fall.

4. Profits fall.

5. There is contraction in bank credit.

6. Fall in investment leads to reverse action of multiplier.

7. Demand of consumers for various goods fall.

8. There is a feeling of doubt among people, they turned pessimist.

*Depression 

Once the process of recession starts, it becomes almost impossible to stop it It goes on gathering momentum and ends in depression Consequently, economic activities face contraction. Many industries are the wind. It adversely affects the entire economy under depression. All economic factors like income, output, interest, profit, wages, demand, employment etc. Have the tendency to contract.

1. Level of output fall.

2.Income falls

3.Wages, interest in other costs decline

4.Prices fall

5.Volume of profits falls sharply

6.Inducement to invest is very low

7.People grow pessimist

8.Demand for consumer goods fall

9.Old machines are not replaced their phone. The demand for capital goods also falls

10.There is all-round decline in investment leading to reverse action of multiplier.

*Recovery

It is worth noting that depression cannot last forever during the face of depression entrepreneurs do not replace machines, production falls. Stock of goods are at their lowest. But even at this time sometimes the need for the replacement of machines becomes so imperative that entrepreneurs are obliged to buy new machines. As a result, demand for capital goods increases and investment in capital good industries is increased. Therefore, there is rise in output and employment. The wave of recovery once initiated feeds itself.

1. Replacement investments results in increased income and output.

2. Employment increases.

3. Price is beginning to look up.

4. There are more profits.

5. Investment increases.

6. Demand for loans increases.

7. Pessimism gives place to optimism.

Causes of Trade Cycles

Internal causes

1. Fluctuations in Investment

 These originate from within the economy itself

When business invest heavily in new projects, factories and technology, economic activity grows, but if investment suddenly slows down, it can trigger a downturn. 

2. Changes in consumers' confidence.

High consumer confidence leads to more spending and economic expansion. But when people fear job losses or inflation, they cut their spending which leads to recession.

3. Monitory policy shift.

Central banks raise or lower their interest rates This significantly affect the economic activities too much tightening of the monitory policy can choke growth, and too much expansion can lead to inflation.

4. Inventory cycles.

Business stock of goods during boom and cut back during slowdowns. These inventory adjustments and amplify cycles.

5. Over production and speculation.

In booms firms may produce more than demand, eventually, corrections follow, causing recessions.

External causes

These come from outside the domestic economy

1. Global economic shocks.

Events at the global level can significantly affect the economy for example to 2008 crisis or the Gulf crisis, 1991

2. Wars and political instability.

Conflict at the global level can disrupt trade leading to rise in prices. It also creates uncertainty. For example, the Russia Ukraine war affected the global energy prices.

3. Technology change.

Major innovations and inventions. A global level can boost productivity, but it can also cause structural unemployment and lead to disruptions in the job market.

4. Natural disaster and pandemics.

Events like earthquake tsunami floods or global economic pandemic is like Covid 19 can lead to sudden demand and supply shocks

5. Commodity price volatility 

The prices of gas, oil, food grains et cetera can cause inflation and slowdowns, especially in import dependent countries. 

Methods to Control Trade Cycles

Controlling trade cycles requires a combination of monetary and fiscal policies. Central banks can adjust interest rates and manage the money supply to regulate borrowing costs, influence consumption and investment, and control inflation. Governments can also play a role through fiscal policy, increasing or decreasing spending to boost or slow down the economy, and adjusting tax rates to influence consumer spending and business investment. Additionally, regulatory policies can help prevent excessive speculation and stabilize financial markets, while countercyclical policies can mitigate the fluctuations of trade cycles by saving during booms and spending during recessions. By implementing these measures, governments and central banks can promote economic stability, reduce the severity of recessions and expansions.