Trade cycles, causes, remedial measures

1. Business cycles or Trade cycles
BY
Dr.S.Subbalakshmi,MA,M,Phil,PhD
Chair Business & Economics
FBS BUSINESS SCHOOL
Vijayawada & Bangalore

2. What are trade cycles
Trade cycles or business cycles are
prominent feature of the capitalistic
economies. Trade cycles are regular
fluctuations like expansion, recession,
contraction, and revival in the economic
activities of the economy. The two
extreme features are boom and depression

3. Phases of business cycles
• Slump and depression
• According to Harberler it is a state of affairs in
which real income consumed or volume of
production per head, and the rate of
employment are falling and are below the line
of steady growth line.
• Result – decline in input – decline in
employment – decline in purchasing power –
decline in profit margins – decline in
investment

4. Recovery
• After depression lasts for some time the situation is
found favorable for business venture.
• Wages are low – materials are cheap – prices of
goods are low but costs too are low – induced
entrepreneur with financial banking orders for
repairs – renewals – replacements – construction –
and allied industries receive orders – employment
increases – newly acquired purchasing power
increases demand for consumer goods

5. Boom
• Recovery once started gathers momentum.
The revival in one industry leads to revival in
many more – general revival in dd- prices
show an upward swing – business men’s
profit margins increase since the prices of
factors still are low – exceptional business
activity – over trading – idle factors employed
fully – further dd raises their prices – profit
margins are narrowed – then disappear.

6. Recession / crisis
• Business men stop ordering further
equipment – bankers insist on repayment
– stocks accumulate as liquidity desire
among people rise. DD decreases – prices
fall – production falls – slump /depression
starts

7. Remedial Measures
• Two sets of measures
preventive and curative are
required to remedy the trade
cycles.

8. Preventive measures
• Preventive measures – not very important
– trying to prevent wars, epidemics –
countries like India trying to prevent the
negative impact of failures of monsoons
with canal irrigation, watershed
management, reservoir system- drip
irrigation etc., may prevent droughts and
can prevent climatic causes of trade
cycles.

9. Curative measures
• Curative measures – Quantitative credit
control measures
• Monetary policy – Quantitative measures are
• Bank Rate: Bank rate is the rate at which
central bank discounts the bills of commercial
banks. Undue expansion is prevented by
increase in the bank rate – credit made dearer.
During depression bank rate is decreased –
stimulates business activity – help recovery.

10. Open market operations
• Open market operations - Deliberate direct
sale and purchase of government securities
and bills .
• During depression – purchase of securities –
cash reserves with commercial banks
strengthens, credit expansion takes place.
During Boom – RBI sells securities – cash
reserves with banks decrease – credit becomes
dearer – investment options decrease.

11. Variable reserve ratio
• Cash reserve ratio – refers to that
portion
of total deposits which commercial
bank has to keep with RBI in the form
cash reserves.
.
• Boom : CRR is increased
• Depression : CRR is decreased

12. Statuatary Liquidity Ratio
• Statuatary Liquidity Ratio: SLR is that
portion of total deposits which the
commercial bank is required to keep with
itself in the form of liquid assts ie., cash,
gold or government securities.
• Boom : SLR is increased
• Depression: SLR is decreased

13. continued
• Reporate: The rate at which
commercial banks borrow from RBI
• Boom: Repo rate is increased –
borrowing becomes costlier
• Depression – Repo rate is reduced –
borrowings from RBI becomes
cheaper

14. Reverse Repo rate
• Reverse Repo rate: The rate at which RBI
borrows money from banks.
• Boom: Reverse repo rate is increased.
Commercial banks transfer more funds to RBI
• Reserves with banks reduced – loans become
costlier
• Depression: Reverse repo rate is decreased –
funds remain with banks – credit becomes
cheaper.

15. Qualitative credit control measures
• Fixation of margin requirements
• Consumer credit regulation for speculation
• Issue of directives ( appeals or warnings written
or oral)
• Rationing of credit- based on purpose wise
• Moral suation – asking for cooperation from
commercial banks to comply with monetary
policy
• Direct action – Charging penal rate of interest.

16. Fiscal policy
• What is fiscal policy?
• It refers to the government policy
of changing its taxation and
public expenditure programs to
achieve certain predetermined
objectives.

17. Public expenditure
• Public expenditure: Public expenditure
increases the funds into the economy. Public
expenditure increases private incomes and
thereby increases private expenditure. This
policy is used during depression. Keynes is the
proponent who suggested government role of
pump priming during great depressions of
1930’s

18. Taxation Policy
• Taxation policy : It is withdrawal
of funds from the private use.
Taxation reduces private
disposable income and thereby
increases public expenditure. In
order to retain boom and stop
recession taxation policy is used.

19. Tax Revenue and Government
expenditure
• Tax revenue and government
expenditure form the two sides of
government budget.
• These two policies together are
jointly called budgetary policies.

20. THANK YOU