Trade cycle - business cycles
Business cycles
The period of high income output and employment has been called the period of expansion, upswing or prosperity and the low income output and employment has been described as contraction, recession and depression. The economic history of the free market capital countries has shown the period of prosperity or expansion, alternates with the period of contraction or recession.
There are typically two important phase in a business cycles that are prosperity and depression. The other phases that are expansion, peak, trough, recovery and intermediary phases.
Three factors cause each phase of the business cycles. Those are forces of supply and demands, the availability of capital and consumer confidence in the future. The goal of economic policy is to keep the economic growing at a substantial rate. It should be strong enough to create jobs for everyone who wants one, but slow enough to avoid inflation.
Business cycles theory
A number of theories have been developed by many economists from time to time to understand the concept of business cycles.
In nineteenth century many of the classical economists such as, Adam smith, miller and Ricardo have a study on business cycles. They linked economic activities with the Say's low, which stated that supply create it's own demand. They believe stability of an economy depends.
Economist hawtrey, suggested that business cycles the continuos phase of inflation and deflation. According to him, changes in economy take place due to changes in the flow of money.
For example, when there is increase in money supply, there would be increase in prices and profit and total output. He advocated that the main factor that influence the flow of money is credit mechanism, in economy, the banking system plays a major role in increasing money flow by providing credit.
The period of high income output and employment has been called the period of expansion, upswing or prosperity and the low income output and employment has been described as contraction, recession and depression. The economic history of the free market capital countries has shown the period of prosperity or expansion, alternates with the period of contraction or recession.
There are typically two important phase in a business cycles that are prosperity and depression. The other phases that are expansion, peak, trough, recovery and intermediary phases.
Three factors cause each phase of the business cycles. Those are forces of supply and demands, the availability of capital and consumer confidence in the future. The goal of economic policy is to keep the economic growing at a substantial rate. It should be strong enough to create jobs for everyone who wants one, but slow enough to avoid inflation.
Business cycles theory
A number of theories have been developed by many economists from time to time to understand the concept of business cycles.
In nineteenth century many of the classical economists such as, Adam smith, miller and Ricardo have a study on business cycles. They linked economic activities with the Say's low, which stated that supply create it's own demand. They believe stability of an economy depends.
Economist hawtrey, suggested that business cycles the continuos phase of inflation and deflation. According to him, changes in economy take place due to changes in the flow of money.
For example, when there is increase in money supply, there would be increase in prices and profit and total output. He advocated that the main factor that influence the flow of money is credit mechanism, in economy, the banking system plays a major role in increasing money flow by providing credit.
Schumpeter Theory
Schmpeter considered trade cycles to be the result of innovation activity of the entrepreneurs in competitive economy. Who develop his model of the trade cycle as consisting of two stages. The first stage deal with the initial impact of innovation, which entrepreneurs introduce in their production process. The second stage follow as a result of reactions of competitors to be initial impact of the innovation.
There is a wave of expansion of economic activity. This is what schumpeter called the " primary wave" this primary wave is followed by a " secondary wave" of expansion. As potential profit s in the industries increase, a wave of expansion in the whole economy follows.
This is the secondary wave of credit inflation that gets super imposed on the primary wave of expansion. Over optimism and add to the enthusiasm for expansion under boom conditions.
The period of prosperity ends as soon as new products induced by the waves of innovations replaced old ones. Since demand for old products goes down. Their prices falls consequently their producer firms are forced to contract their out put.
Some of them may be forced in to liquidation. When innovation begin repaying their bank loan out of the newly earned profits the quantity of money in circulation is reduced as a result of which prices tend to fail and profit decline. In this atmosphere, uncertainty and risk increases depression sets in.the impulse for further innovation is sapped up.the painful process of readjustment to the of previous neighborhood equilibrium begins. The economy is on its way downward into depression.
Money capital and bank credit play a significant role in the schumpeterian theory. According to schumpeter, credit is important only in so far as the innovation is concerned in the context of a progressing economy and only if the innovator requires credit to carry on his fiction. Schumpeter assumes innovative activity is helped by the banking system readiness to give credit, the " swarm like" appearance of entrepreneurial activity natural raises the volume of investment, which in raises income level, employment and output. Thus, the prosperity phase gathers momentum and the economy moves up,away from neighborhood of equilibrium.
The clustering of innovation creates a discontinuous disturbance in the economy. It will lead to overwhelming outflow of innovations are beginning to have their full effect, when the market is flooded with new products their prices and profit margins are decline. When there is over production in the prosperity period, general prices declines reducing the profit margins of new investment makes innovations financially unattractive.
Money capital and bank credit play a significant role in the schumpeterian theory. According to schumpeter, credit is important only in so far as the innovation is concerned in the context of a progressing economy and only if the innovator requires credit to carry on his fiction. Schumpeter assumes innovative activity is helped by the banking system readiness to give credit, the " swarm like" appearance of entrepreneurial activity natural raises the volume of investment, which in raises income level, employment and output. Thus, the prosperity phase gathers momentum and the economy moves up,away from neighborhood of equilibrium.
The clustering of innovation creates a discontinuous disturbance in the economy. It will lead to overwhelming outflow of innovations are beginning to have their full effect, when the market is flooded with new products their prices and profit margins are decline. When there is over production in the prosperity period, general prices declines reducing the profit margins of new investment makes innovations financially unattractive.
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