What is the Trade Cycle? Features, and Types
- 23 Sept 2024
- By: BlinkX Research Team
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The "trade cycle" refers to the naturally occurring cyclical variations in economic activity that occur in economies. The cycle is described by phases of expansion, peak, contraction, and trough, each of which represents a different stage of the cycle.
A rise in economic activity during the expansionary phase leads to growth. The peak, or the highest point of expansion, is followed by the contraction phase, which is marked by a decline in output and growth. After that, the cycle continues as the economy enters an expansionary stage. The recession's lowest point is indicated by the trough. In this blog, we will look into what is trade cycle, trade cycle meaning, features of the trade cycle, and more.
Trade Cycle Definition
Business or trade cycles are the terms used to describe the cyclical expansion and contraction of economic activity. Period of Expansion, Upswing, or Prosperity" refers to the era of high income, high output, and high employment. The era of contraction, recession, downswing, or depression is a time of low income, poor production, and low employment.
Now that you understand the trade cycle's exact meaning let's look at its features.
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Table of Content
- Trade Cycle Definition
- Features of Trade Cycle
- Different Types of Trade Cycles
- Trade Cycle Theories
- Trade Cycle Phases
Features of Trade Cycle
The trade cycle's key features are as follows:
- Economic Activity Movement: A trade cycle is a wave-like movement of the economy that exhibits both an upward and a negative tendency
- Periodic: Trade cycles do not exhibit the same regularity but recur periodically
- Different Phases: Trade cycles go through several phases, including prosperity, recession, depression, and recovery.
- Two distinct types of trade cycles exist: small and large. Primary trade cycles last 4–8 years or more, whereas minor trade cycles last 3–4 years. Although the time of trade cycles varies, they all follow a similar pattern of successive stages.
- Duration: Trade cycles can last between two years and a maximum of twelve years.
- Dynamic: All economic sectors change as a result of business cycles. Other factors, including employment, investment, consumption, interest rate, and price level, also experience fluctuations along with output and income.
- Phases are Cumulative: In a trade cycle, expansion and contraction are, in fact, cumulative, rising or reducing over time.
- Economic Uncertainty: Business people face economic uncertainty which is because earnings vary more than any other source of income.
- International Character: Trade Cycles have a global nature. Consider the 1930s Great Depression.
Different Types of Trade Cycles
Dynamic forces at work in a capitalist system produce different types of economic fluctuations. Listed below are the types of trade cycles:
- A cycle of Short Duration: This trading cycle lasts for a brief time. Other names for it include minor cycles. It has a 3–4 year lifespan.
- Secular Trends: This trade cycle, also known as a long-term cycle, lasts a considerable amount of time. It also goes by the name of the primary cycle.
- Seasonal Fluctuations: This term refers to trade cycles due to the economy's seasonal variations. For instance, a poor monsoon may result in an economic downturn, while a strong monsoon and an upward trend may follow.
- Unpredictable or Random Fluctuations: These trade cycles take place during times of strikes, war, etc., which shocks the economy.
- Cyclic Fluctuation: These shifts in economic activity resemble waves and are brought on by recurrent expansion and contraction periods. Economic changes in supply, demand, and other variables can create an upswing from a trough (low point) to a peak and a downswing from a rise to a track.
Trade Cycle Theories
Several business cycle hypotheses are listed below.
Keynesian Theory
Its foundation is that governments should boost expenditure and reduce taxes to increase demand during recessions. This idea suggests that by injecting additional funds into the economy, a government's intervention might lessen the severity of economic downturns. It encourages investment and consumption. Further economic expansion is facilitated by this increased activity, which also contributes to the creation of employment and household income.
The Austrian Theory
According to this theory, such cycles occur mainly because capital resources are misallocated due to artificially low interest rates set by central banks. It suggests that investors get too enthusiastic about potential profits when central banks reduce interest rates too rapidly or significantly. Thus they assume higher levels of risk as a result. These investments eventually result in losses for the investors.
The Monetarist Theory
According to this theory, boom-bust cycles are caused by inflationary forces. A company's production input costs, such as labour, materials, etc., rise more quickly than its output prices due to rises in overall demand. Because of this, they sell fewer units for a profit, which lowers overall business confidence and investment levels. Additionally, it causes GDP growth to slow over time to the point where an eventual economic recession happens.
Trade Cycle Phases
The phases of a trade cycle in economics are as follows.
The Peak Phase
It is when economic activity is at its peak and growth is at a standstill. Businesses operate fully during this phase, with high consumer spending and investment levels. As a result, prices rise due to inflation when demand exceeds supply. There may be indications that the economy is starting to slow down as it nears the apex of a cycle, such as growing unemployment or declining consumer confidence.
The Phase of Contraction
Beginning a recession means less company investment and consumer spending, causing the economy's production to drop. As a result of businesses cutting back on output in reaction to a decline in demand for products and services, inflation often declines during this time. Due to companies reducing personnel expenses to maintain profitability, unemployment also increases dramatically during this time.
The Phase of the Trough
No rebound will occur when economic activity reaches its lowest point following a recession. In this phase, GDP growth may stagnate or decline further depending on external causes like world events or political unrest. Regardless of their previous downturn, most economies ultimately rebound in some way.
The Phase of Expansion
It happens when the economy recovers from a recession, and investment flows return to the markets. The unemployment rate declines, and inflation returns to more manageable levels than at earlier peaks. Businesses take advantage of this by growing their operations and funding brand-new initiatives. Over time, it fuels more economic expansion until a new cycle starts.
Conclusion
Now that you understand the trade cycle, it is essential to recognize the importance of trade cycles. Both in terms of short-term volatility and longer-term structural changes, they have a substantial impact on enterprises and the economy. Companies contribute to economic activity during times of expansion; in contrast, recessions result in decreased output and job losses. Understanding the trade cycle is crucial for economists, policymakers, companies, and investors as it sheds light on the cyclical nature of economic activity. If you’re looking to start your journey in the financial markets, open a Demat and trading account with BlinkX to start trading. You can download the BlinkX trading app to make your first stock market trade.
