Theories of trade cycle ppt. Top 6 Theories of Trade Cycle 2022-10-31
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The trade cycle, also known as the business cycle, is a pattern of fluctuations in economic activity that is characterized by periods of expansion and contraction. These fluctuations can have significant impacts on economic indicators such as employment, production, and prices. There have been various theories proposed to explain the underlying causes of the trade cycle and to identify potential ways to mitigate its negative effects.
One of the most influential theories of the trade cycle is the monetary theory, which suggests that changes in the money supply and credit conditions play a key role in driving economic fluctuations. According to this theory, an expansion in the money supply can lead to increased spending, which can drive up demand for goods and services and lead to an economic expansion. Conversely, a contraction in the money supply can lead to a decline in spending and a slowdown in economic activity.
Another theory of the trade cycle is the real business cycle theory, which suggests that fluctuations in the trade cycle are driven by changes in technology and productivity. According to this theory, technological innovations and improvements in productivity can lead to increased output and economic growth, while declines in productivity can lead to economic downturns.
A third theory of the trade cycle is the Keynesian theory, which emphasizes the role of aggregate demand in driving economic fluctuations. According to this theory, changes in the level of aggregate demand can lead to changes in production and employment, and thus influence the trade cycle. The Keynesian theory suggests that government intervention, such as fiscal policy or monetary policy, can be used to stabilize the trade cycle and mitigate its negative effects.
Overall, there are many different theories that attempt to explain the underlying causes of the trade cycle and to identify potential ways to mitigate its negative impacts. While no single theory has been able to fully explain the trade cycle, a combination of these theories can provide a more comprehensive understanding of the forces at play in driving economic fluctuations.
Trade theory
When the demand grows, that country should move production factories to a developing country to meet demands at less cost. There may be scarcity of labour, raw material and other factors of production. This causes an increase in money supply and rise in price leading to expansion. Gold in the world. Unable to repay bank loans, some firms go into liquidation, thus forcing banks to contract credit further. Because of the low prices of goods, producers are not willing to expand production.
Psychological Theory: This theory was developed by A. The financial markets tend to revive well before the trough. The process of contraction becomes cumulative leading to depression. Banks will give more loans to traders and merchants by lowering the rate of interest. Robertson has successfully combined real and monetary factors to explain business cycle.
8 Theories of International Trade: Explained, PPT Available
The recession of 1953-54 in America was not caused by shortage of resources. This much of investment is insufficient to keep the economy at the ceiling level, and then the downturn starts. Cyclical variations in the quantity of money may well be an important element in the ordinary mild business cycle. Since investment in an innovation is risky, he must pay interest on it with his newly acquired funds, the innovator starts bidding away resources from other industries. Hicks Theory Warranted rate of growth : is the one that will sustain itselfin congruity with equilibrium of saving and investment Autonomous investment : Direct response to invention Long range investment Induced investment : Level of income Multiplier and Accelerator : Time Lag Consumption of current year is a function of income oflast year ex: buying a car. He opines that non-monetary factors like strikes, floods, earthquakes, droughts, wars, etc.
TERMS TO REMEMBER 16. At Q 2, the slump reaches the bottom or floor provided by the LL line. Many times the profits are ploughed back to finance innovations. Then fall in employment leads to fall in income, expenditure, prices and profits. On the other hand, in deep depression cycles, there has been a greater fall in money stock. Innovations are regarded as the routine of industrial concerns and do not require an innovator as such.
If car production has more efficient then India should produce and export manufactured cars. According to Hayek, when the fall in prices comes to an end during depression, banks begin to raise the supply of money which reduces the market interest rate below the natural interest rate. FACTORS Rate of investment depends uponRate of interestMarginal efficiency of capital Entrepreneurial expectations Pessimistic Optimistic 23. Schumpeter has developed innovation theory of trade cycles. The initial rise in demand will thus be followed by a fall in demand.
Low interest rate induces producers to get more loans from banks. Thus expansion or contraction of credit cannot originate either boom or depression in the economy. For instance, if the market rate of interest is lower than equilibrium rate of interest due to increase in money supply, investment will go up. First mover advantage — Capturing the market by introducing a new product or market. It believes that over production in one sector leads to over production in other sectors. Only applicable when there are many firms with different production processes so it can change products easily.
Features of a Trade Cycle: 1. This cycle is also known as the major cycle. In order to repay bank loans,businessmen start selling their stocks. But they are accentuated by bank credit. According to Schumpeter, innovations in the structure of an economy are the source of economic fluctuations. All these will bid up the prices of assets and of both producer and consumer goods. This hardly paid attention to the welfare of workers which leads to the exploitation of workers.
About the causal relation between the money stock and economic activity, they make the following generalisations: i Changes in economic activity have always been accompanied by changes in the money stock; ii There have not been major changes in the money stock that have not been accompanied by changes in economic activity; and iii Changes in the stock of money have been attributed to a specific variety of exogenous factors rather than to changes in economic activity. According to Hicks, this upswing phase relates to the standard cycle which will lead to an explosive situation because of the given values of the multiplier and the accelerator. The economy does not turn upward immediately from Q 2 but will move along the slump equilibrium line to Q 3 because of the existence of excess capacity in the economy. Innovation theory Innovation can be of various types 1-new product 2-new market 3-niche market 4-new technology 5-new source of raw material 19. But Hawtrey believes that an expansion of credit leads to a boom. Further, it is also possible, as pointed out by Schumpeter, that autonomous investment may itself be subject to fluctuations due to a technological innovation.
Product prices are equal to both average and marginal costs. COMPARISON OF INDIAN BUSINESSCYCLE BETWEEN POST REFORM ANDPRE-REFORM 13. The commercial banks will create more money with increase in their reserves, thereby transmitting the increase in high-powered stock of money. Hence trade cycle is a wave like movement. In actuality, traders do not depend exclusively on bank credit but they finance business through their own accumulated funds and borrowing from private sources.
