Trade Cycle

Discipline: Economics

First observed by the English economist Sir William Petty (1623-1687), trade cycle is defined as the existence of fluctuations in national income over a variable timespan. Government policy is used to dampen the magnitude of the fluctuations in order to maintain stability in the economy.

Petty's findings were later developed by English economists Thomas Malthus (1766-1834) and John Stuart Mill (1806-1873), the German political economist Karl Marx (1818-1883) and the Norwegian economist RAGNAR FRISCH (1895-1973).

There are several explanations for these cycles:

(1) In the 1940s and 1950s, Paul Samuelson, John Hicks, Richard Goodwin, WILLIAM PHILLIPS and Michal Kalecki combined the multiplier with the accelerator theory of investment (multiplier-accelerator).
(2) Milton Friedman asserts that business cycles are a monetary phenomenon.
(3) They may be the effect of changes in technology and taste changes.
(4) Ragnar Frisch found that a dynamic system with certain mathematic properties produced a 'damped' cycle with wavelengths of four to eight years.

Also see: fine-tuning, Kondratieff cycles, multiplier-accelerator, political business cycle, product life-cycle theory, sunspot theory

Source:
RCO Matthews, The Trade Cycle (Cambridge, 1959);
R F Harrod, The Trade Cycle (Oxford, 1936);
E D Domar, 'Capital Expansion, Rate of Growth, and Unemployment', Econometrica, vol. XIV (April, 1946), 137-47

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