• 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 —
• 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.
• 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.
• Income, employment and output decline sharply by the recessionary trends.
• Investments fall and enterprise is discouraged.
• Pessimism leads to depression and deflation.
• 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.