The trade cycle refers to the ups and downs in the level of economic activities which extends over a period of several years. If we examine the past statistical record of the business conditions, we will find that businesses are not run smoothly over long durations. They face many fluctuations in different periods. Some of these are favorable while others have an adverse effect on the business. Prosperity is followed by adversity.

There are four phases of trade cycle which are depression, recovery, boom and recession.

In depression, economic activities are very low and there is a fall in the national income, employment and production. Costs are high and profit are low. This fall in profit translates to reduction in capital goods.

The recovery phase develops when the stocks are exhausted. This is the phase where cost stop increasing and prices stop falling any further. There is a complete harmony in cost and price. Profits start to grow which is used to repair and replace capital equipment. Money income increases and so does purchasing power.

Next comes the boom where economic activities are further increased. Production, prices, employment, wages, interest rates, profits, volume of credit and investment all experience a growth. New plants and factories are set up and new business appear.

The last the the recession. This phase will ultimately turn to depression. Costs begin to increase as wages continue to increase but prices start to fall due to competition. A wave of pessimism and uncertainty prevails over the business. There is a fall in the production, investment and employment.