What is Trade Cycle? Meaning, Definition Features, and Types

What is Trade Cycle? Meaning, Definition Features, and Types

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The variations in economic activity that occur over time are called trade cycles, sometimes called economic or business processes. Indicators like the gross domestic product (GDP), employment levels, and investment show the pattern of growth and contraction in a nation's overall economic output.

Several variables, such as economic indicators, interest rates, business earnings, geopolitical developments, investor sentiment, and market speculation, impact the stock market's trade cycle.

The more significant trade cycle has an impact on individual trading account. Businesses frequently see increased sales and profits during the trade cycle's expansion phase, characterised by a growing general economy. As a result of companies making more money from their trading activity, this may have a favourable effect on individual trading accounts. 

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

  1. Trade Cycle Definition
  2. Features of Trade Cycle
  3. Different Types of Trade Cycles
  4. Trade Cycle Theories
  5. Trade Cycle Phases
  6. Conclusion 

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.
  • Business people face economic uncertainty: which is exacerbated by the fact that 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 endures for at least four and a half years. 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 contends 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 contends that investors get too enthusiastic about potential profits when central banks reduce interest rates too rapidly or significantly. They thus 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 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 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 recognise the value 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. Open a demat and trading account with blinkX to start trading. You can download the blinkX trading app to make your initial stock market trade.

Trade Cycle FAQs

The trade life cycle, often referred to as the trade processing life cycle, describes the numerous steps and procedures required to execute and settle a deal in the financial markets.

The trade cycle has growth, peak, contraction, and trough phases. It is impacted by shifts in total demand and supply shifts, corporate confidence, monetary and fiscal policy, technological development, and foreign shocks.

Every stage of the trade cycle might have a different length. While larger cycles might last many decades, shorter cycles may only last 3 to 5 years.

For economists, decision-makers, companies, and investors, comprehending the trade cycle is essential because it sheds light on the cyclical structure of economic activity.

Due to the effect of several complex components and the potential impact of unanticipated occurrences, the trade cycle cannot be forecast with complete confidence.