Schumpeter Description

According to Schumpeter, a cycle represents wave like deviations in business activity from the equilibrium or trend line. There are equilibrium points and the equilibrium areas cluster around these equilibrium points. Schumpeter analysis involves the four phase cycle consisting of the prosperity, recession, depression and recovery. The business cycle is divided into two parts the upper half and the lower half. The upper half part of the cycle above the trend or equilibrium line is divided into prosperity and recession while the lower half part of the cycle below the trend line is divided into depression and recovery. Figure shown below illustrates the four phase Schumpeterian trade cycle. In the fig. the prosperity and recession phases show that the level of aggregate economic activity in the economy is above normal while the depression and recovery phases show that the economy is operating at below normal level of economic activity. In the prosperity phase, employment continues to increase but at a diminishing rate until the cycle peak is reached. In the recession phase, employment decreases at an accelerating rate until the Point of inflection is reached at B. Hereafter, the cycle moves into the lower half of the four phase cycle. The lower half, like the upper half, is also divided into the two phase of depression and recovery. In the depression phase, employment continues to fall but the rate of fall gradually decreases until the cycle trough is reached. In the recovery phase employment continues to increase at an increasing rate until the point of inflection reached.