• The business world in capitalistic economy is said to experience ups and downs in its economic activities.

• The fluctuations take the form of Wave are known as Trade Cycle or Business Cycle, in economics.

• Every trade cycle pass through four phases, such as —

Prosperity

• The main spring of business prosperity is profit.

• In a capitalist economy as profits inflate, industrialists and businessmen get necessary incentive to produce more and invest more.

• More investment leads to more employment and so more income more effective demand.

Recession

• Excessive expansion leads to diseconomies of large scale production, rising cost, higher wages and much shortages.

• When demand for bank credit being high and rising, interest rates tend to move up.

• These diminish profit to a lower level.

Depression

• Income, employment and output decline sharply by the recessionary trends.

• Investments fall and enterprise is discouraged.

• Pessimism leads to depression and deflation.

Recovery

• Depression does not continue for indefinite period.

• It is an improving stage of trade.

• Weaker units are liquidated, old debts are repaid, and enterprises are reorganized.

• Unemployment rate gradually decreases.

• Income is generated.