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What's a trade cycle
Vinod Anand | 10 Feb 2012

Trade cycle refers to regular oscillations in the level of business activity over a period of years.

TRADE CYCLE refers to regular oscillations in the level of business activity over a period of years. In the post-war years, the trade cycle has been controlled to the point where absolute downward movements in the level of output have been largely eliminated in the western industrial economies. The trade cycle has, in consequence, been replaced by the recession, in which temporary pauses in the advance of total output occur and are followed by an assumption in growth.

Although sharp downward movements in output and employment have been largely eliminated, a steady upward progression with full employment has proved elusive in 'free-enterprise economies'. Considerable attention has been given to the Trade Cycle phenomenon by economists, culminating in the work of SAMUELSON, NICKS, Goodwin, PHILLIPS and Kalecki in the late 1940s and the 1950s.

Most explanations of the existence and nature of the cycle are based on the determinants of business investment, and its effects, through the multiplier process, on the level of national income. The accelerator theory of investment, in conjunction with the multiplier, can be used to show that the adjustment of the level of investment to the rate of change of sales gives rise to cyclical fluctuations in national income.