Phases of a Standard Trade Cycle:

According to Arthur F. Burns and W. C. Mitchell, a typical or standard trade cycle consists of four closely interrelated phases of revival, expansion, recession, and contraction. The peak and trough the critical mark-off point in the cycle.

According to Schumpeter, a trade cycle involves the four phase cycle consisting of the prosperity, recession, depression, and recovery. The trade cycle is divided in two parts the upper half and the lower half. The upper part of the cycle above trend or equilibrium line is divided into prosperity and recession while the lower part of the cycle below the trend line is divided into depression and recovery. Figure below illustrates the four  phases of a trade cycle:

Depression:

As a general rule, a recession occurs when real output declines for a period of six months or more but it is difficult to define depression. Ruffin says, “A depression is a very severe downturn in economic activity that lasts for several years. Real output declines during this period by a significant amount and unemployment rate rises to very high levels.

Recovery:

But things are not going to be in a depressed state forever. After the depression has lasted for some time, entrepreneurs see rays of hope and begins to overcome pessimism. The low wages, availability of capital and skilled workers at low prices makes investments profitable. The optimism slowly expands and business starts earning profit thus revival starts.

Prosperity:

The prosperity is marked by all round improvement in the economy with respect to output and employment. This is a stage of high capital investment in infrastructure and industries, expansion of bank credit, high profit and full employment. Prices touches new peaks the business optimism is at the highest. This results in shortage of workers and capital resulting in high cost of production. This reduces profit and booms starts disappearing,

Recession:

After boom the economic activities take a down turn. Fearing that the era of profits has come to a close. Businessmen stops ordering further equipment and materials. Bankers insists on repayment. Desire for liquidity increases. This accentuates the depression. Prices collapse, business fails and unemployment rises. The recession has a cumulative effect and turns into depression.

The four phases of trade cycles discussed above are not sequential in nature therefore it is difficult to predict the state of business activities. It is also not known how much high will be the peak of the cycle but this is certain that wave like fluctuations take place in every country at random.

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