WHAT ARE THE PHASES OF THE TRADE CYCLE?  

PHASES OF TRADE CYCLES:

Trade cycles are characterized by ups and downs in macroeconomic variables like investments, output, etc. Trade cycles are divided into 4 phases recovery, prosperity, recession and depression.

1) Depression: depression is a period of low economic activity. Depression is characterized by a falling economy and the growth rate is below a steady growth rate. There are considerable reductions in macroeconomic variables like production, employment, investment, income, output, bank credit, fewer profits, etc. A famous incident of depression is great depression of 1929-1932 which was one of the reasons for world war 2.

2) Recovery: When the economy registers upward trends in output, employment, investments, income, output, etc. But the growth rate is still below a steady growth rate. The main reason for the recovery phase is the increase in aggregate demand i.e increase in spending of individuals, businesses, and government.

3) Prosperity: Prosperity is a phase of boom. It is characterized by an increase in employment, investments, output, standard of living, etc. In the prosperity phase growth rate is above a steady growth rate which indicates an increase in economic activity.

4) Recession: Every good phase of the economy ends and the economy enters in downward phase. A recession is a phase characterized by a decline and contraction in economic activity. The recession phase begins with a decline in growth rate but the growth rate is still above a steady growth rate. During the recession, profits fall which leads to a fall in investments, output, employment, etc.                                                 

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