Since all the sectors of economy are closely integrated with each other, the business fluctuations which occur in the sectors generate fluctuations in the aggregate sense. These fluctuations can be observed in the National Income, output level, employment level, cost of production, interest rate and other rewards of factors, amount of investment credit money securities etc.

Business fluctuations can be measured from the boom period of a trade cycle to the boom period of the next trade cycle. From this we are able to see the various phases of trade cycle which are four together.

(1) Expansion/Boom
(2) Recession
(3) Contraction/Depression
(4) Revival

Expansion or Boom
The expansion phase generally starts with an increase in the expected rate of profit. When the entrepreneurs are optimistic about the future business prospects they tend to employ more labourers to work on the plants and machineries so as to produce more goods and services.

So as a result of this phenomenon the demand for raw material will go up and hence there will be an expansion in the raw material industry. Following this, price of raw material will rise due to the inelastic demand. Hence, cost of production goes up which results in the prices of goods and services in the market to go up as well.

Eventually the labourers would demand a higher wage rate, which is their given. As the labours, spend most of their income on consumer goods, this result in prices of the consumer goods moving up even further due to a greater demand for them. This occurs for some time.

In order to produce more goods and services to meet the higher demand, entrepreneurs will be pressing for more credit facilities to obtain the resources to produce the goods and services. As a result of this, the quantity of money go up and as a result of an increase in demand for money, the rate of interest will go up and as a result of an increase in the demand for money, the rate of interest will also go up. Likewise the rewards of other factors of production go up as well. Thus, incomes of the people go up which enables the government to increase the tax rates. As prices go up, the expected rate of profit of the entrepreneurs go up as well. This will lead to natural tendency of the entrepreneurs being more and more optimistic about the future business prospects. Following this, investment expands and so do the credit facilities. Hence, the velocity of circulation of money increases resulting in both the output level and employment level to increase.

Due to the increase in investment, prices of securities shoot up. Hence, as a result of the continuous increase in the level of National income and output level, the whole economy attains the full employment level.

At this stage the level of economic activities reach this peak is commonly known as the boom of a trade cycle.

Recession
Conversely, the forces which had generated the expansion automatically bring an end to it as increases in the cost of production of the goods and services exceed the rate of increase in the general price level. Following this, the profit margin of the entrepreneurs starts to decline.

The cost of production increased due to the inelastic demand for the factors of production as compared to their limited supply. The general price level does not increase much due to the vigorous competition between the firms in the market (of the product). As a result of this, generally the cost of production exceeds the increase in the general price level, thus, the expected profit of entrepreneurs begin to fall.

Consequently, entrepreneurs squeeze their investment which creates a situation of panic and the banks, being more sensitive to this situation, start demanding the firms to return the loans. A number of firms eventually are not able to do so and declare themselves bankrupt.

Since the aggregate investment tends to fall, the output and income levels also decline and as a result the employment activities are reduced. The stock market faces a downward tendency and the joint-stock companies are unable to expand their business activities and commodity markets do not find customers. Hence, the whole economy is seen as to be marching to a downward position.

This transitory phase is known as the recession period of a trade cycle.

Contraction of Depression
In this period of trade cycle National Income and employment fall to the lowest ebb.

Prices begin to fall a very low level, credit money is squeezed and similarly the rates of all the factors of production are very low and the economy becomes virtually stagnant at the lowest level of activity.

Prof. Haberler has defined depression in the following way….

“By depression in the technical sense we mean those prolonged and conspicuous falls in the volume of production, real income and employment, which can only be explained by the operation of factors originating within the economic system itself and in the first instance by an insufficiency of monetary demand and the absence of a sufficient margin between the price and the cost.”

Therefore, in a phase of depression, profit expectations of entrepreneurs are bleak due to which investment, income and output fall and eventually result in massive unemployment. Wage rates are being cut down sharply, prices of raw material go down as there is no demand for them and hence rewards of the factors go down. Thus, banks and insurance companies are unable to find any clients for business purposes and inspite of the low cost of production. Due to this phenomenon, the investment in not provoked even at the lowest rate of interest possible. This is merely because during a depression period, investment would yield nothing but losses.

Revival or Recovery
As a result of the depression and with the passage of time, consumers and producers are determined to overcome the misbehavior of cost of production and the general price level due to which they generate a wave of optimism in the economy.

When the consumers find themselves short of durable consumer goods they create demand for them. The producers make full use of this opportunity and start expanding their plants and machinery to produce goods and services to meet the demand of the consumers. In this way investment level rises and employment opportunities are created, demand for the raw material increases, gradually rewards to the factors of production also increase and thus the National Income and per capita income also move up and this would lead to a demand for consumer goods once again.

In order to meet the demand of the consumers, old firms are revived and new firms join the market. Hence, saving and investment continue to increase. Following these banks induced to advance loans and with the passage of time the supply of money and its velocity increases. This leads to a competitive attitude in the money and product markets.

With a rise in the general price level, the entrepreneurs accepted rate of profit also rises and once again they become optimistic about their business prospects and start to increase their activities in the stock market. Long term projects are initiated which indicate restoration of confidence among entrepreneurs about the future.

This upward tendency in all sectors of the economy is called the revival phase of a trade cycle which ultimately leads to another boom.