Causes of Trade cycle

Causes of trade cycle

1. Changes in climatic conditions

   When climate is favorable, agricultural activities and other related ones such as ago based industries are stimulated which results into expansion in output, employment opportunities, incomes, etc. and hence an expansion in economic activities. However, with unfavorable climate such activities contract and hence decline in employment, income, output etc.

2. Change in the age of capital

   When machines are new, they tend to be more efficient and hence more output, income, employment opportunities and hence expansion in the levels of economic activities but it is time which gives on machine become older through depreciation, which reduces efficiency and hence fall in output, incomes, employment opportunities and finally a contraction in economic activities.

3. Technological innovation

   When a new technology is discovered, it will result into better methods of production and hence output, incomes, employment opportunities. etc and hence expansion in the level of economic activities but when the innovations do not take place regularly and hence fluctuation in the level of economic activities.

4. Changes in government policy

   The government policy is as well responsible for fluctuations in the level of economic activities. If the government opts for an expansionary fiscal policy and monetary policies such as decrease in taxes increase in government expenditure. etc., it will result into expansion of economic activities. However, if the government opts for contraction momentary policy such as increase in taxes, decrease in government expenditures, it will result into contraction in economic activities.

5. Changes in marginal efficiency of capital

   The level of investment is an important factor as regard to the level of economic activities but however this depends primary on marginal efficiency of capital. When marginal efficiency of capital increase investment expands output increases, employment and incomes also increases and hence expansion. On the other hand when MAPC decline, it will result into decline on investments, output, employment etc. and hence a decline in the level of economic activities.

6. Changes in political climate

   When there is political stability, investment expands and hence increase in output, employment opportunities, incomes and hence expansion in the level of economic activities. On the other hand, with political instability the economic activities decline.

7. Unpredictable changes in business investment depending on business optimism and pessimism (Psychological factor)

   When entrepreneurs are optimistic, they will have confidence and hope for better business and profit then they will motivate more increased investment and hence expansion in the level economic activities.