Explain The Climatic Theory And Modern Theory Of Trade Cycle.


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Robert Lamp Profile
Robert Lamp answered

A trade cycle refers to fluctuations in economic activities specially in employment, output and income, prices, profits etc. It has been defined differently by different economists. According to Mitchell, “Business cycles are of fluctuations in the economic activities of organized communities. The adjective ‘business’ restricts the concept of fluctuations in activities which are systematically conducted on commercial basis.

The noun ‘cycle’ bars out fluctuations which do not occur with a measure of regularity”. According to Keynes, “A trade cycle is composed of periods of good trade characterised by rising prices and low unemployment percentages altering with periods of bad trade characterised by falling prices and high unemployment percentages”.

Haider Imtiaz Profile
Haider Imtiaz answered
Several theories of trade cycle have been put forward from time to time two of them are these:-

Climatic theory: Climatic or sun spot theory was presented by Jevon in 1884. He says that trade cycles are caused by sun spot which appears on the face of the sun at regular intervals. The sun emits less heat and more radiation. There are fewer rates. The climates become unfavorable for agriculture. The agriculture output falls. The low agriculture production affects the output of industries.

There is unemployment. The production and income comes down in all sectors of the economy. As a result, there is depression on the other hand, when the spots of the sun disappear, it emits normal heat. There are more rains. The agriculture production is increased. The income of the farmers goes up. The increased demand raises the level of employment and investment and it will be period of expansion or boom once again.

Modern Theory of trade cycle: Modern theory of trade cycle was explained by J.R. Hicks in 1950. The theory states that it is interaction of multiplier and accelerator which bring change in gross national income. According to multiplier when investment increases, it increases the income. But income increases more than the size of multiplier e.g. if the value of multiplier is 5 and investment is of 100 will raise national income by R.s500 etc.

The increase in income further leads to greater investment through the accelerator effect. The stock of capital depends upon the level of income, if the income level is higher. The capital assists will also be higher. When the demands for consumer goods increase, it will affect the demand for capital goods. So we find that investment first effect the income then income effects investment.

When net investment increases, the income rises in a greater proportion depending upon the size of multiplier. The expansion phase of trade cycle stars when the investment increases. The recession phase starts when the investment falls which ultimately reduce, output and employment in the country and depression phase sets in.

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