This document outlines several theories of business cycles or trade cycles including climatic, psychological, innovation, monetary, over-investment, over-production, and Keynesian theories. It provides a brief overview of each theory, noting key aspects like how sunspots, optimism/pessimism of businessmen, money supply changes, innovations, interest rates, overproduction, and changes in aggregate demand and investment can influence economic expansions and contractions over time. The document also discusses some criticisms of each theory, such as unrealistic assumptions or other factors not considered.

1. LEAD College of Management,Presentation by: Nelson Kuriakose

2. Theories of trade cycle/business cycle
1) Climatic or Sunspot theory
2) The psychological theory
3) Innovation theory
4) Monetary theory
5) Over-investment theory
6) Over-production theory
7) Keynes’ theory

3. Sunspot theory
Offered by Mr . Jevan.
Trade cycles are caused by sun spots.
Sunspots appear on the face of the sun.
Almost at regular intervals of 10.4 years.

4. SPOT APPEARS
SUN EMITS LESS HEAT
CROP YIELD WILL BE LOW
INCOME OF FARMER FALLS
LESS PURCHASING POWER

5. Drawback
• Based on only agro based theory
• Good or bad crop can only be one factor of
depression or expansion but they cannot
account for all the features
• The trade cycle occur at regular intervals of
10.4 years, while length of the trade cycle is 7
to 8 years

6. The psychological theory
 Given by professor PIGOU
 Trade cycles are caused by the optimistic and
pessimistic attitude of the businessman
OPTIMISTIC
 Brisk businessman earn high profits and expands
the investment and production
 Overestimate the future demand of goods and
increase the production

7. Psychological theory (cont’d)
PESSIMISTIC
businessman puts less investment and less
production
Rate of employment and rate of profit
decreases
Supply exceeds the demand so price falls.

8. Drawbacks
• Considers only psychological views of
businessman
• Ignore other factors

9. Monetary theory
• Takes money supply into consideration
• Deals with money expansion and contraction
• Money contraction - demand falls, rate of
interest increases- decreased borrowings
• Money expansion – demand rises, rate of
interest decreases- increased borrowings

10. Criticism
• Trade cycle is not purely monetary
phenomenon
• It is world wide phenomenon

11. Innovation theory
• Innovation can be of various types
1-new product
2-new market
3-niche market
4-new technology
5-new source of raw material

12. Innovation theory
• Innovation leads to more production
• Ultimately increase in aggregate demand
• Further increase in income of business

13. Drawback of innovation theory
The full employment assumption is unrealistic.
Bank is not the only source of finance for every
innovation in business.
Many times the profits are ploughed back to
finance innovations.
Innovation cannot be the sole cause of business
cycle.

14. Over investment theory
• Natural rate of interest is determined at a
point where savings(voluntary)= investment
• if market ROI < natural ROI
then, businessman demands more investment,
capital, more prod., more income, more
labour, more demand

15. Cont’d
• If market ROI> natural ROI
then reduction in capital demanded , less prod.
, less labour , less income , less demand

16. Over prod. theory
• If economic system is capitalism, all the
entrepreneurs wants to produce goods which
are profit making
• Leads to high competition because of entry of
new firms
• Profit making possibility : high
• Due to over production activity, initially
everything increases

17. Cont’d
Thereafter as a result firms starts
withdrawing resulting in
Less demand
Less income
Less production
Less labour

18. Keynes theory
1)concept of marginal efficiency of capital(mec)
MEC:-
rate where price of capital=yield from capital
Example: buying of a machinery- how much
return will we get in the coming years
2)Says that depression & unemployment is there
because there is decrease in the aggregative
demand.

19. • Now aggregative demand can be increased:
1.investment 2.consumption
and we know in short run consumption cant
be increased….but so can investment
So, by controlling the investment, depression &
unemployment can be reduced in the short
run.
3) Yield depends on the expectations
(psychology):: yield is the only factor
affecting MEC and yield is affected by the
psychology of the entrepreneur….

21. Email: nelson@lead.ac.in
LEAD College of Management,
Palakkad