Trade cycle consists of two factors; optimism and pessimism. Optimism is the stage where there is mass production, more profit and high employment level. The economy shows a upward trend. In short all the conditions are in favor of business. The second stage is known as pessimism is the stage where the profit is adverse and the prices and demand of a product falls and the employment decreases. Now we will elaborate these terms into detail.
Let is divided them further into four categories. The first one is the expansion or boom. Here the profit is maximized, the employment level is high and the production is enough. The resources are fully utilized. The demand for labor also increases. It is not necessary that the boom should reach the full level of employment. According to the laws of nature boom converts into recession which is also known as contraction. The cost is more than price, so the profit automatically stops, there are chances that the company may suffer loss. A wave of uncertainty surrounds the business sector.
After this disaster the depression of contraction begins. In this period of depression the economic activities are not very active and are low. The national income of falls, employment and production level also falls. . But at this stage the costs are relatively high than the price. Overall profit falls and the consumer market goes down. The main characteristics of this stage are; production level along with trade activities decreases. Profit and income wages falls. After this odd and uneven period the things begins to settle and stable. We name this stage recovery or revival. Depression is removed and atmosphere for business gets better and again the sign of boom and expansion begins. There is a slow but gradual process of reemployment starts.
This is how a trade cycle completes its circle and comes to the same point where it started. There are certain features of trade cycle which you should keep in mind while studying it.
Trade cycle is a constant and continuous process of depression and boom, these two conditions follow each other. And the effect of these situations is for all the industries. Now due to the international trade one country is linked to another, so the effect of one country will surely induce the same effect in another linked country. The boom and depression period and time for the consumer and capital market can be different. The time in which the trade cycle usually completes is about eight to eighteen years. The recovery process is usually slow in nature as compared to depression. Trade cycle is a simultaneous process where one stage crates a force which causes the next stage to start and end.