Phases of Economic Cycle.The optimism and pessimism of the business is called trade cycle/ business cycle”. Optimism: The optimism refers to the situation when production is increased, employment is increased, prices are falling and value of money is rising. Pessimism: The pessimism refers to the situation when production is decreased, employment is decreased, prices are rising and value of money is falling.
(i) “A economic cycle is composed of periods of good trade characterized by rising prices and low unemployment percentages, alternating with periods of bad trade characterized by falling prices and high unemployment percentages”.
(Keynes)“fhe trade cycle is an alternation of period of prosperity and /depression of good and bad trade
In short period, a trade cycle is completed from 8 to 18 years and in the long run, it is completed from 26 to 50 years.
Phases of Economic Cycle In Every Country.
- PEAK OR BOOM:
In this phase economic activities increase production, prices, employment, wages, interest rate, profit volume of credit and investment. New plants and factories are setup and old ones are fully utilized. Demand for labour increases and there is increase in the volume of profit.
Note: It is not necessary that boom should reach the level of full employment.
- Level of full employment is achieved.
- Cost of production increases due to increase in wage rate.
- The volume of investment reaches its peak point.
- New factories and plants are established.
- All sectors of economy produce goods and services with full capacity
In this phase the costs begin to increase than the prices. Because the less efficient factors of production are employed at higher costs, the ‘ profit begins to disappear. A wave of pessimism and uncertainty prevails in the business. There is a fall in the production, investment and employment. Even the businessman closes the business. The recession phase comes to an end and goes into depression.
- Cost of production increases as compared to prices.
- Expected profit of producer begins to fall.
- Aggregate investment trends to fall.
- Output and income level also decline.
- A wave of pessimism and uncertainty prevails the business.
- DEPRESSION OR TROUGH
In the period of depression economic activities are low and there is a fall in national income, employment and production. The costs are relatively higher than prices. Profit falls and there is a reduction in the consumer and capital goods. Producer suffers loss and demand for bank credit also falls. Effective demand and savings remain low.
- The volume of production and trade decreases.
- The level of income wages, profits falls.
- Demand for goods and services shrinks.
- Production of capital goods comes to an end.
- There is general tendency of contraction in credit and investment.
- RECOVERY OR REVIVAL:
During this period constructional and development the government starts works. In this period depression is removed and there is the aning of boom and expansion. There is complete harmony between cost and price. Profit begins to reappear in the business. The repairs and replacement of capital equipments start. There is a gradual reemployment of labour. The commercial banks also expand the credit. The marginal efficiency of capital begins to rise and rate of investment increases. According to Samuelson, “Business conditions never stand still prosperity is followed by panic”.
- The consumers increase their expenditures and the demand for consumer goods begins to increase.
- Producers expand their plants and machinery to produce goods and services.
- Level of employment gradually increases.
- Rewards of factors of production increase as a result NI and per capita income also move up.
- Quantity of money and its velocity increases.