8/6/2019 tradecycle-capibud

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Theories of Trade Cycle:

Non-Monetory Theories

Climatic Theory-Any change in climatic condition shall affect production in theindustries. Eg: Sun Spot Theory by Stanely Jevones when there is any climatic

change, black sport are created in the sun, this means depression in the economy.

Psychological Theory- Based upon the psychology of the businessmen.Overproduction Theory - Due to overproduction. the business cycle may also be

affected.

Under consumption-when individuals start following this, again business cycle isbeing affected. Eg:less production has to be done.

Innovation- If there is any innovation brought in the market, people may tend to buy

and thereby leading to expansion in economic activities.

Monetary Theories - Supply of money resulting in C&E.

Eg: Banks having links directly with consumers, by providing consumer product loans.

So if money is provided, there is expansion cycle.Over investment Theory-At times Banks when provide loans with lesser interest, capital

goods industrialists take up this opportunity. This can be viewed in the Boom periodwhen there is more expansion in the capital goods industry.

Eg:For the purchase of bolts/nuts.

CAPITAL BUDGETING concerned with designing & carrying through a systematicinvestment programme. Capital Budget includes a list of what management believes to be

worthwhile (profitable) projects for the acquisition of new capital assets together with the

estimated cost of each project.Each proposal is accompanied by a justification. The time duration for decision-making

for capital investments may be for years. Ex:-Expansion-this deals whether to build/buy a new plant/factory. We shall calculate thecost involved & what can our returns be.

Choice of Equipment deals with identifying which equipment shall give more return on

investment.Buy/Lease whether to buy or lease a building, etc

Capital Expenditure this shall deal only about the rate of turnover into cash. Eg:

If we buy a machinery (is an expense) though it produces 200units extra. So here we buyand get more units within the same time and with more labors.- This does not come under

Capital Expenditure.

We buy machinery with many assumptions/judgment of how much it can produce after acertain period of time. Later if any new machine has been introduced, we cant

immediately purchase.Eg- CExp.

So CEx. Involves irretrievable decisions (invested capital cant be got backinstantly. So the rate of turnover is very long.

Capital Budget Proposal includes:-

Description of the proposal / Proposed investment/outlay/ expected earnings

Projects expected life (eg.-machinery)/Payback period/Expected rate of return