Definition of a Trade Cycle:

A number of theories have been developed by different economists from time to time to understand the concept of Trade cycles. Some economists emphasize non-monetary factors such as meteorological or climatic factors, psychological factors or innovations whereas some others emphasize the monetary factors. According to these economists Trade cycle is purely a monetary phenomenon.

Nineteenth century, classical economists, such as Adam Smith, Miller, and Ricardo, have linked economic activities with the Say’s law, which states that supply creates its own demand. They believed that stability of an economy depends on market forces. But world economies were not stable as predicted by these classical economists and the world witnesses the Great Depression in 1929-30. This proved the point that business conditions are never stand still and fluctuations in the output is a part of capitalist system.

There is a difference between economic crisis and trade cycle. An economic crisis means a period of stress and strain when business men find it difficult to fulfil their commitments. Crisis relates to some individual trades or business when they find it difficult to honour their repayment schedule. For example a bad weather may result in crop failure and farmers may default in payment of bank loans. If accentuated it may lead to financial crises and lead to failure of financial institutions on a large scale. But none of these situations can be called a Trade Cycle. It is difficult to know when and how exactly the trade cycle starts. In Trade cycles there is a series of booms followed by a slump. Thus when fluctuations occur in the aggregate economic activity with certain degree of regularity following a pendulum like oscillations it may be referred as Trade or Business Cycle.

According to Wesley C. Mitchell, “Business cycles are species of fluctuations in the economic activities of organised communities”.

According to Keynes, “A trade cycle is composed of period of good trade characterized by rising prices and low unemployment percentage, alternating with period of bad trade characterized by falling prices and high unemployment percentage.” (A Treatise on Money, Vol. I p.78)

According to James Arthur Estey, ‘These cyclical fluctuations are characterized by alternative waves of expansion and contraction. They do not have fixed rhythm, but they are cyclical in that the phases of contraction and expansion recur frequently and fairly similar patterns.” (Business cycles, p.11)

According to Frederic Benham, “A Trade Cycle may be defined, rather badly, as a period of prosperity followed by a period of depression.”

After studying these definitions we conclude that in industrial economies the path of the economic progress has been irregular. Trade being good at some time and bad at others. During good times business expands, production moves up, incomes and employment increase with prices and profitability. But this rosy situation could not continue for a long after sometime prices start falling, profitability declines and unemployment rises. Thus prosperity is followed by a period of adversity. This is in fact a trade cycle.