Output fluctuation and growth

 Business / Trade cycle Meaning:

A number of theories have been developed by different economists from time to time to understand the concept of Trade cycles. Some economists emphasise non-monetary factors such as meteorological or climatic factors, psychological factors or innovations whereas some others emphasise 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. Prof. Samuelson writes, "Prosperity may be followed by panic or crash. Economic expansion gives way to recession. National Income employment and production fall. Prices and profit decline and people are thrown out of work. eventually botton is reached and recovery begins, The recovery may be slow or fast. It may be incomplete or it may be so strong as to lead to a new boom."  This is known as business cycle. 

Haberler says, " The term business cycle may be defined as altaration of periods of prosperity and depression of good and bad trade."

Keynes writes, " A trade cycle is composed of periods of good trade characterising by rising prices and low unemployment percentages altering with periods of bad trade characterised by falling prices and high unemployment percentages." No Two cycles are perfectly regular with uniform frequency and amplitude yet they have much in commom. They have commom features and one can recognise them easily. There is no simple formula to predict the timing of future business cycle rather they occur at irregular interval the output and employment would always vary and there is no fix upper or lower turning points.

Economic crisis and Trade Cycle

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 occure in the aggregate economic activity with certain degree of regularity following a pendulum like oscillations it may be referred as Trade or Business Cycle.