Can You Explain The Keynesian Theory Of Trade Cycle?

J.M. Keynes has never worked out a complete theory of the trade cycle. He in his famous book general theory had added notes on the trade cycle. In these notes, he provided analytical tools for the purpose of building a complete theory of trade cycle.

According to Keynes, the cyclical fluctuations are caused by changes in the marginal efficiency of the capital as the relation between the prospective yield of that type of capital and cost of producing that unit. If the prospective rate of return of capital used in the business is higher than the current rate of interest, the entrepreneurs are encouraged to increase investment spending on construction, equipment, and inventories.

Marginal efficiency of capital depends upon two factors:
Expected return from capital assets and the supply price or replacement cost of the assets. Marginal efficiency of capital is raised by opening of a new investment, a new product, anew method of production, a major change in the organization of business and by the expectation of rising prices. It is lowered by falling prices, rising costs, productive difficulties and a decline in investment.

A rise in marginal efficiency of capital relatively to the current rate of interest leads to a burst in investment. The volume of employment and income increase. Then the demand for consumer goods up which always leads to further increases in investment and for the goods industries.