Top 3 Measures used to Control the Trade Cycle | Macro Economics

The following points highlight the top three measures used to control the trade cycle. The measures are: 1. Price Adjustment Policy 2. Price Control, Price Support and Rationing 3. Organisation and Management of the Labour Market.

Measure to Control Trade Cycle # 1. Price Adjustment Policy:

Those who regard market price variations as major causes of instability advocate a policy of encouraging price flexibility as one of the important weapons of stabilisation.

They argue that it would curb profit inflation reduce the duration of recessions and inflation by reducing the disparities between controlled and uncontrolled prices.

But to lay down and to follow a suitable price policy is by no means an easy task. It has its own limitations.

Firstly, a downward price adjustment may increase output and employment in particular industries with elastic demands without having any favourable effects on the economy as a whole.

Secondly, if prices of commodities and factors fall simultaneously leaving the price-cost relation unaffected, the inducement to investment will get a setback.

Thirdly, even if a rise in the marginal efficiency of capital takes place on account of the fall in factor prices without a corresponding fall in the prices of the output, it is offset by the fall in aggregate demand.

Even if price flexibility could raise employment it would be temporary unless proper monetary and fiscal measures are also adopted at the same time. Price-cost policy may be important in those sectors of the economy where price movements are of strategic importance.

Measure to Control Trade Cycle # 2. Price Control, Price Support and Rationing:

Many countries adopted price control rationing during war and post-war periods to meet the usual situation of inflation and adopted price supports to arrest a downward trend of prices. Price control aims at fixing the upper limit beyond which prices may not rise. This measure became popular during periods of runaway inflation and profiteering. But it has a few limitations.

It may lead to contrived shortages, ques and inequality in the distribution of goods. Thus price controls must be accompanied by restrictions on purchasing power. Rationing is disliked on the ground that it leads to wastage of resources and also impairs freedom of consumption.

Price support on the other hand aims at not allowing prices to fall below a certain minimum when that happens; the government comes to the rescue of the producers by entering the market as the single bulk purchaser at statutorily fixed prices. This policy has been followed in India to support the prices of agricultural commodities. The success of such a policy, however, depends on the possession of vast resources honest and efficient administration.

Measure to Control Trade Cycle # 3. Organisation and Management of the Labour Market:

Frictional unemployment is caused by lack of correspondence between supply and demand for different kinds of workers in different occupations. Such unemployment can be reduced by spreading information and effecting recruitment through employment agencies and providing training and retraining facilities for developing skill and for promoting occupational mobility of labour.

It is now realised that, “systematic organization of the employment market is an essential condition for permanent solution of the problem of unemployment. It has a vital part to play in eliminating unemployment caused by friction in the working of the economy or by structural changes in the industry.” Milton Friedman has also supported the programme of spreading information about job opportunities and training facilities.

He expressed the opinion that unemployment in advanced countries could not be removed by macroeconomic monetary, fiscal and income policies alone unless these are accompanied by information on jobs and reorganization of labour markets.

Further, seasonal unemployment can be eliminated by adopting suitable techniques for integration of different industries and by dovetailing of agriculture and industry. Government must encourage such improvements as will enable land to be cultivated intensively through proper combination and rotation of crops. Where this is not possible, seasonal employment for agriculturists has to be found in other occupations. Supplementary occupations and diversification of industries can do a lot to reduce seasonal unemployment.

The I.M.F., I B R D, and other economic agencies of the United Nations are evidence of the world’s desire to maintain economic stability through co-ordinated efforts. In so far as most economies continue to be open economies, foreign trade is likely to be destabilising.

Thus, the necessity of coordinating the incomes, fiscal and monetary measures with international measures to maintain full employment become obvious. International trade helps attainment of international equilibrium by eliminating trade barriers but at the same time depression in one country is passed on to the other country through the mechanism of foreign trade.

We can suggest the following international measures to promote full employment:

(i) Creation of a workable system of international trade for a stable and expanding world economy, thereby providing conditions required for elimination of undesirable trade barriers and for the restoration of free convertibility of currencies.

(ii) Acceleration of the orderly development of underdeveloped areas of the world. In order to achieve this, the industrially advanced countries should follow a more conscious policy of foreign aid.

(iii) Preventing the international propagation (spread) of fluctuations in effective demand with a view to stabilising internal trade. This can be done by maintaining external disbursements on current account in the face of internal fluctuations of effective demand.

(iv) Providing a mechanism for maintaining internal and external balance by facilitating the system of international payments.