as waves and tides continuously occur in the sea, in the economy also one phase follows the other as economic ups and downs fluctuations occur. according to American economists Arthur f. burns and Wesley c. Mitchell, in any trade cycle there will be two states of minimum "trough" and maximum "peak". two other state will be included in these two states. according to these facts the phase of trade cycle can be divided in to the following four parts:
1. Depression or contraction
2. Recovery or revival
3. Prosperity
4. Recession
1. depression or contraction
it is very difficult to point out the starting point of the trade cycle because depression follows the state of prosperity and the state of prosperity is again reached after the state of depression. most of the people have taken the state of depression as the starting phase of the cycle.
in the state of depression, there will be unfavorable situations everywhere in the economy. since price of the goods is in a decreasing state, the investors are discouraged to invest. due to less investment, output and employment will decrease. so, in the first phase of trade cycle the business will be in a very poor state. the wage of the labors will decrease as a result of decrease in investment. the purchasing power of the money will increase. there will be a lot of changes in the distribution of the national income. the profits of the investors will decrease and move towards a zero stare or even a negative state. despite the increase in purchasing power of money, the purchasing power of the people will be very low due to a great degree of unemployment. specially, the effect of trade cycle on the inductees of basic necessities such as food,clothing,etc. will be less . due to decrease in the price of raw materials used by construction industries, the farmers are also affected. due to this there will be discouragement everywhere in the economy. depression expanding widely in the following features can be seen in the economy with the state of depression:
(a) decrease in output and business.
(b) high degree of unemployment and very low of income.
(c) decrease in demand and fall in price level.
(d) excessive decrease in the price of raw materials and agricultural goods than the price of produced goods.
(e) decrease in credit demand is resulted due to decrease in investment.
(f) decrease in the rate of interest.
(g) decrease in the number of investors and the risk-bearers.
(h) failure in economic activities
(i) due to decrease in construction works, the state of closing down of industries will be created.
(j) there will be a state of discouragement everywhere in the economy.
2. Recovery or revival
recovery or revival is the second phase of the trade cycle. in this phase , the trade cycle slowly rises and moves towards the state of prosperity from the minimum trough. that is , recovery process starts after the economy reaches the trough and is in a very poor condition. in this phase, the economy will slowly rise towards the state of prosperity recovery seen in the economy will bring about hopes to the entrepreneurs and investors. the investors will be ready to bear risks in investing. in such a period, factors of production, the profit will start increasing. this will encourage the investors towards investment .many new industries will be established in the economy. due to increase in employment income. purchasing power of people, etc. the demand will also increase. as a result, prices of goods will also start rising. with the expectations of earning high profits the investors will increase the rate of investments. this will have direct cumulative effect on employment, income demand price,etc.
in such a situation, investors will start taking loans from banks and financial institutions. this will have a positive effect in the economy. the depression emerged in the first phase will be slowly removed. due to investments in new sectors there will be increase in public expenditure, investment, development of new production technologies, employment, velocity of money, etc. however, the entrepreneurs and investors will move forward very carefully with the clear view of the future because the effects of depression state will be fresh with them. as a result all economic activities of the economy will increase . the main features of the recovery of revival phase are as follows:
(a) increase in output and employment
(b) increase in income and demand
(c) increase in price
(d) increase in wage and interest rate
(e) increase in exchange
(f) increase in credit demand for investment
(g) prevailing of hopefulness everywhere in the economy
3. prosperity
after the phase of recovery, the phase of prosperity emerges in the trade cycle. this phase is the third phase of the trade cycle. prosperity is the best phase of the trade cycle. in the state of prosperity. real income and output will increase. employment level will increase as well as none of the factors of production will remain unemployed. as a result , business parties and entrepreneurs will earn maximum profits. more labors will be required for the higher level of production. this will bring about the state of full employment. Keynes has said that in such a situation, voluntary unemployment exists but the number will be very small. the purchasing power of the people will increase as well as new and improved machines will be used in the industry. in the state of prosperity , output,wages, price, income, employment, etc. will increase. in such a state,retailers will stock more goods than demanded with the view of earning profits. when price rises, with the expectations of excessive profits, the producers will also produce excessive quantity. the following are the features of the prosperity phase:
(a) excessive increase in the output and employment
(b) increase in demand and price
(c) increase in wage and interest rate
(d) increase in profits due to excessive increase in price relative to increase in production cost
(e) excessive increase in investment and product in
(f) excessive increase in loan and bank credits
(g) comprehensive expansion in industrialization
(h) excessive increase in stock and inventories
(i) good signs and full of hopefulness everywhere in the economy
(j) optimum utilization of all factors of production
4. Recession
in trade cycle, after the phase of prosperity , the phase of recession or contraction starts. in this state, the entrepreneurs and businessmen will start suffering loss in their productive activities. as a result, industries will start closing down. this will stop the new investments also. this will directly affect the productive and capital goods or additional consumption goods. as a result, wage,demand, price and investment will decrease. this will further result in the decrease in output, employment income, bank credits, profit,etc. in such a situation, negative multiplier will be active in the economy. this will have cumulative effect on recession. in the end, the trade cycle will enter into the state of depression.
so, the state of economy after the state of propriety in which the economy is heading downwards is known as the phase of recession.
1. Depression or contraction
2. Recovery or revival
3. Prosperity
4. Recession
1. depression or contraction
it is very difficult to point out the starting point of the trade cycle because depression follows the state of prosperity and the state of prosperity is again reached after the state of depression. most of the people have taken the state of depression as the starting phase of the cycle.
in the state of depression, there will be unfavorable situations everywhere in the economy. since price of the goods is in a decreasing state, the investors are discouraged to invest. due to less investment, output and employment will decrease. so, in the first phase of trade cycle the business will be in a very poor state. the wage of the labors will decrease as a result of decrease in investment. the purchasing power of the money will increase. there will be a lot of changes in the distribution of the national income. the profits of the investors will decrease and move towards a zero stare or even a negative state. despite the increase in purchasing power of money, the purchasing power of the people will be very low due to a great degree of unemployment. specially, the effect of trade cycle on the inductees of basic necessities such as food,clothing,etc. will be less . due to decrease in the price of raw materials used by construction industries, the farmers are also affected. due to this there will be discouragement everywhere in the economy. depression expanding widely in the following features can be seen in the economy with the state of depression:
(a) decrease in output and business.
(b) high degree of unemployment and very low of income.
(c) decrease in demand and fall in price level.
(d) excessive decrease in the price of raw materials and agricultural goods than the price of produced goods.
(e) decrease in credit demand is resulted due to decrease in investment.
(f) decrease in the rate of interest.
(g) decrease in the number of investors and the risk-bearers.
(h) failure in economic activities
(i) due to decrease in construction works, the state of closing down of industries will be created.
(j) there will be a state of discouragement everywhere in the economy.
2. Recovery or revival
recovery or revival is the second phase of the trade cycle. in this phase , the trade cycle slowly rises and moves towards the state of prosperity from the minimum trough. that is , recovery process starts after the economy reaches the trough and is in a very poor condition. in this phase, the economy will slowly rise towards the state of prosperity recovery seen in the economy will bring about hopes to the entrepreneurs and investors. the investors will be ready to bear risks in investing. in such a period, factors of production, the profit will start increasing. this will encourage the investors towards investment .many new industries will be established in the economy. due to increase in employment income. purchasing power of people, etc. the demand will also increase. as a result, prices of goods will also start rising. with the expectations of earning high profits the investors will increase the rate of investments. this will have direct cumulative effect on employment, income demand price,etc.
in such a situation, investors will start taking loans from banks and financial institutions. this will have a positive effect in the economy. the depression emerged in the first phase will be slowly removed. due to investments in new sectors there will be increase in public expenditure, investment, development of new production technologies, employment, velocity of money, etc. however, the entrepreneurs and investors will move forward very carefully with the clear view of the future because the effects of depression state will be fresh with them. as a result all economic activities of the economy will increase . the main features of the recovery of revival phase are as follows:
(a) increase in output and employment
(b) increase in income and demand
(c) increase in price
(d) increase in wage and interest rate
(e) increase in exchange
(f) increase in credit demand for investment
(g) prevailing of hopefulness everywhere in the economy
3. prosperity
after the phase of recovery, the phase of prosperity emerges in the trade cycle. this phase is the third phase of the trade cycle. prosperity is the best phase of the trade cycle. in the state of prosperity. real income and output will increase. employment level will increase as well as none of the factors of production will remain unemployed. as a result , business parties and entrepreneurs will earn maximum profits. more labors will be required for the higher level of production. this will bring about the state of full employment. Keynes has said that in such a situation, voluntary unemployment exists but the number will be very small. the purchasing power of the people will increase as well as new and improved machines will be used in the industry. in the state of prosperity , output,wages, price, income, employment, etc. will increase. in such a state,retailers will stock more goods than demanded with the view of earning profits. when price rises, with the expectations of excessive profits, the producers will also produce excessive quantity. the following are the features of the prosperity phase:
(a) excessive increase in the output and employment
(b) increase in demand and price
(c) increase in wage and interest rate
(d) increase in profits due to excessive increase in price relative to increase in production cost
(e) excessive increase in investment and product in
(f) excessive increase in loan and bank credits
(g) comprehensive expansion in industrialization
(h) excessive increase in stock and inventories
(i) good signs and full of hopefulness everywhere in the economy
(j) optimum utilization of all factors of production
4. Recession
in trade cycle, after the phase of prosperity , the phase of recession or contraction starts. in this state, the entrepreneurs and businessmen will start suffering loss in their productive activities. as a result, industries will start closing down. this will stop the new investments also. this will directly affect the productive and capital goods or additional consumption goods. as a result, wage,demand, price and investment will decrease. this will further result in the decrease in output, employment income, bank credits, profit,etc. in such a situation, negative multiplier will be active in the economy. this will have cumulative effect on recession. in the end, the trade cycle will enter into the state of depression.
so, the state of economy after the state of propriety in which the economy is heading downwards is known as the phase of recession.
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