Question

Describe Schumpeter’s 4 phase mode of a trade cycle

Answer 1

Explanation:

Schumpeter develops his model of the trade cycle as consisting of two stages.

The first stage deals with the initial impact of the innovation which entrepreneurs introduce in their production process. The second stage follows as a result of the reactions of competitors to the initial impact of the innovation.

Schumpeter starts his analysis by assuming the equilibrium state of the economic system where all the factors of production are fully employed. Every firm is producing efficiently with average costs equal to price. Product prices are equal to both average and marginal costs.

Profits in the Schumpelerian sense are zero. There is no net saving and no net investment. Schumpeter calls this equilibrium state of the economy as a “circular flow” of economic activity which just repeats itself period after period like the circulation of blood in the animal organism.