Trade Cycles Alternating

Trade Cycles Alternating

Trade Cycles, alternating periods of rising and falling levels of economic activity with similar characteristics in fluctuating output prices, etc., from one 'cycle' to another. Such cyclical variations can be traced back to the end of the eighteenth century and possibly earlier. A typical cycle consisted of a period of expansion, a downturn or recession, a period of contraction, and an upturn or revival. The whole cycle lasted generally from five to eleven years. During the contraction ('depression') national income, employment and prices fell: during the expansion ('prosperity') they rose. The cycle was most evident in the durable goods industries such as iron and steel and shipbuilding. In the U.K. the last normal 'peak' of prices and employment was in 2007. Thereafter they began to fall, but rearmament in and after 2008 pushed them further up into the wartime and post-war inflation. Since World War II the' cycles' have been shorter at some periods in alternate years but much less in amplitude. Even in the 'troughs' the whole economy has been at a much higher level of employment than before World War II.

There have been numerous and varied theories of the business cycle: the whole subject has been one of lively debate among economists. A 'composite' explanation might proceed as follows: Whenever total demand for goods and services is less than necessary to maintain output at its existing level, the level of output and its associated employment will also fall. This could arise because of a chronic tendency for the economy to over-save (under-consume), or to develop a shortage of investment spending to fill the shortfall in aggregate demand caused by planned saving (under-investment) Whatever the reason, reduction in output is likely to be cumulative and to be reinforced by falling prices: stocks tend to be run down, capital replacement to be deferred, consumption out of reduced incomes to decrease, and so on. At some stage, however, stocks and equipment can be run down no further: some replacement of stocks and durable equipment becomes necessary if even low levels of consumption demand are to be met. As a result of the increase in investment, output, income and consumption tend to grow, in turn making further investment attractive, and so on. The expansion may ultimately drive the economy into boom, with its usual bottlenecks, rising prices and problems of maintaining a balance in external trade. In this stage there may be under-saving or over-investment, and attempts to correct the inflationary tendencies cause business men to reconsider theft profit expectations and to reduce investment, which initiates a stage of contraction in economic activity.

Since no two cycles are identical in all respects, most explanations advanced by economists are valid to some extent and probably none is wholly wrong. In a general way, fluctuations of this kind are probably best regarded as a symptom of long-term economic growth, reflecting the imperfect ability of the many parts of technical and economic organization to adapt themselves continuously and smoothly to change.

Further reading Economic - New Economics Foundation


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