1. THEORIES OF TRADE CYCLE
THE PSYCHOLOGICAL THEORY
Given by professor PIGOU
 Trade cycles are caused by the optimistic and pessimistic attitude of the businessman
OPTIMISTIC
 Brisk businessman earn high profits and expands the investment and production
 Overestimate the future demand of goods and increase the production
PESSIMISTIC
 businessman puts less investment and less production
 Rate of employment and rate of profit decreases
 Supply exceeds the demand so price falls.
OVER INVESTMENT THEORY
• Natural rate of interest is determined at a point where savings(voluntary)= investment
• if market ROI < natural ROI then, businessman demands more investment, capital, more prod.,
more income, more labour, more demand
• If market ROI> natural ROI then reduction in capital demanded, less prod. , less labour , less
income , less demand
UNDER CONSUMPTION THEORIES
• In an expanding economy, production tends to grow more rapidly than consumption. The disparity
results from the unequal distribution of income: the rich do not consume all their income, while the
poor do not have sufficient income to meet their consumption needs. This imbalance between output
and sales has led to theories that the business cycle is caused by overproduction or under consumption.
But the basic, underlying cause is society’s inadequate provision for an even flow of savings out of the
excess of production over consumption. In other words, saving is out of step with the requirements of
the economy; it is improperly distributed over time.
HAWTREY’S MONETARY THEORY
• This trade cycle is a purely monetary phenomenon
• It is changes in the flow of monetary demand on the part of businessmen that lead to prosperity
and depression in the economy

2. He opines that non-monetary factors like strikes, floods, earthquakes, droughts, wars, etc. may at best
cause a partial depression, but not a general depression
SUNSPOT THEORY
 Trade cycles are caused by sun spots.
 Sunspots appear on the face of the sun.
 Almost at regular intervals of 10.4 years
SPOT APPEARS
SUN EMITS LESS
HEAT
CROP YIELD WILL
BE LOW
INCOME OF
FARMER FALLS
LESS PURCHASING
POWER