Internal & External Elements of Business Cycle or Trade Cycle

Wed, 06/27/2012 - 10:21 -- Umar Farooq

Elements of Trade Cycle
They are of two kinds of elements of Business Cycle

  1. Internal Elements of Business Cycle
  2. External Elements of Business cycle

1. The internal or endogenous forces are the elements within business activity itself. They include such items as production, income, demand, credit, interest rate, cost, inven­tories, profits, investment, employment, propensity to consumer, demand for loans.
2. The external or exogenous forces lie outside business activity. They include such elements as population growth, wars, changes in currency, floods, and other catas­trophes.
Movements of the business cycle may be initiated by a change in the relationship of the internal forces that affect the cycle. For example, during a depression a more favourable cost price relationship may develop that would induce more production. Other factors that may bring about an increase in production are inventory increases, lower rates of interest, the replacement of capital goods and favorable psychological outlook.
A higher production will lead to an increase in employment and income. This, in turn, spurs the demand which leads to further investment and increase in production, employment and income. The relationship of the 17 exogenous elements moves the economy through recovery and prosperity.
However, during expansion, certain forces lead to an eventual downturn in the economy. The cost price relationship becomes less favorable, inventories accumulate, demand for capital goods and replacement order slackens off, the interest rates rise and other forces appear to cause a decline in investment and production. This causes a decrease in employment, income and demand and leads to a downswing in the economy.