Page 220 - DECO402_Macro Economics

Unit-24: Trade Cycles: Meaning and Types

2. Recession or upper turn point Notes
3. Contraction or depression or downswing; and
4. Revival or Recovery or Bottom turn
point.
In condition of various cycles, these phases
are recurring and uniform but any phase
does not have a definite time sequence or time
interval. As Pigou has targeted, cycles though
may not be twins but they are of the same
family. Just like families they have similar
attributes which may be described. Starting
from trough or lower point, cycle passes from
the phase of recovery and prosperity, climbs
the peak, falls by the medium of recession
and depression and reaches trough. This is
shown in figure 24.1.
We will further describe these attributes of Figure 24.1
trade cycles.

Recovery

First let us take that situation , when depression had existed for a few days and recovery or lower
turn point starts. Originating forces or starters are exogenous or endogenous forces. Assume that
semi durable things have worn off and consequently it becomes important that they are substituted
in the economy. By this demand increases and for fulfilling the increased demand investments and
employments increase. Recovery of industry starts. Recovery of related capital goods industry also
starts. Once when it starts, process of reupliftment becomes accumulative. Consequently, levels of
employment, income and production in the economy rise slowly. In the initial phases of recovery phase,
there is extra and unused capacity in the economy which production increases without proportionately
increasing the total cost. “But as time passes, production keeps getting less flexible. Obstacles keep
arising with increasing costs, more difficulty arises in distribution and it may happen that ‘plants’
may have to be expanded—in such conditions prices rise.” Increase in profits happen. Improvements
take place in trade expectations. Best conditions are there. Investment is motivated, which increases
demand for bank loans. By this credit expansion takes place. In this way, accumulative process of
investment, employment, production, income and increase in prices feeds itself and becomes self
supporter. At the end, recovery steps in prosperity phase.

Prosperity

In prosperity phase, demand, production, employment and income are at high level. They increase
prices but do not increase in the ratio of wages, salary, interest rates, rent rate and, price rise. By
difference in prices and costs, amount of profits increase. Increase of profits and possibility of their
continuance generally increase the stock market prices. “By the influence of improving expectations
all securities, which also includes bonds, increase. Specific changes happen in stocks. Expectations of
comparatively more profits further increase investments. Liberal bank–credit helps investment. Such
investments mainly happen in bank fixed capital, ‘Plant’, accumulation (Sambhar) and machinery. It,
by increasing demand for consumer goods and by further increasing the price levels does sufficient
expansion in economic activity. By this provision and wholesale dealers and producers are motivated

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