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Trade cycle
- 1. Theories of tradecycle Nasiya V K
- 2. Trade cycle Trade cyclesare recurrent fluctuations in economic activity .
- 3. Phases of tradecycle Prosperity Recession Depression Recovery
- 4. Theories of tradecycle Hawtreys monetary theory Hayek’soverinvestment theory Keynesian theory of trade cycle
- 5. Hawtreys theory Purely monetaryphenomenon Changes in the flow of bank credit Expansion and contraction of bank credit Rate of interest
- 6. Expansion phase Reducedrate of interes Increasing investment activities More factors of production are employed Increasing income leads to increased demand for goods Charge higher prices Traders to induce borrow more Prosperity period ending when banks stops credit expansion
- 7. Reserves reduceddue to credit expansion Banks starts to increase interest rate Ask the business man to repay the loan Starts recessionary process
- 8. Contractionary phase Increasingrate of interest To repay loans business man starts selling their stocks Price falls Declining investment activities Unemployment Falling demand for goods Depression
- 9. Hawtreys recovery processis very slow It will happen in the economy by cheap money policy of central bank
- 10. Hayek’s theory Over investmenttheory Difference between natural rate of interest and the market rate of interest. Natural rate of interest- demand for loan capital equals the supply of saving Market rate of interest- interest rate prevails in the market Equilibrium in the economy- Natural rate of interest= market rate of interest
- 11. If marketrate of interest is < natural rate of interest The demand for funds for investment will exceed the available supply of saving Increasing bank credit leads to increase in money supply Reduction in rare if interest Firms borrow more Increase employment then rise the price level Overinvestment
- 12. If the marketrate of interest > natural rate of interest The demand for funds for investment will be less than the available supply of savings. Contraction in bank credit Decrease in money supply Increase in rate of interest Decreasing economic activity Decrease employment Fall the price level
- 13. Keynesian theory Good trade Badtrade Fluctuations in MEC Expected rate of profit on new investment
- 14. Expansion phase-Boom- rise in investment- high MEC Employment is rising Multiplier effect High MEC – increase in cost of production- increase in output from recently produced capital assets Increase output lowered the profitability of new capital assets.
- 15. Cost of productioncontinue to rise The MEC remains high only as long as the optimism prevails Optimism gives way to pessimism MEC collapsed Investment declined Unemployment
- 16. Contraction startswith a rise interest rate and reverse multiplier effect in the economy Liquidity preference rise A further decline in investment
- 17. The revival ofMEC – recovery phase Length of contraction is depends on the stocks of goods left over from the boom When consumption > total production the rate of interest falls Gradual recovery of business confidence Expansion starts in the economy again.
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