Economic Bubble

Economic Bubble

According to Prateek Singh, the economic bubble refers to a commercial-stage that experiences increase in expansion, followed by a decrease in the factor (Singh, 2015). Similarly, the economic bubble is fostered by increased pricing of financial assets. The rapid growth in the asset prices is as a result of increased expenditure. Increase in the economic growth also results in better organizational performances (Dassios, & Li, 2018). As such, the case results in improved remuneration rates for the employees. Equally, there is improved purchasing power among the individuals that ultimately results in the hiking of asset prices. Additionally, the economic expansion also results in a financial bubble. Increase in the expansion rates enhances liquidity. As a result, the borrowing capacity of individuals increases.

The increased lending rates result in lower interests that ultimately boost investment. The escalation in investment power consequently causes the economic bubble. Further, Singh elaborates that the economic bubble that was experienced in the Netherlands resulted in improved expenditure among the merchants. Likewise, the high investment rates were as a result of increased trade in the Tulips in Europe. Further, the economic expansion in the region was due to the Tulip virus that led to new flower variety. As such, the situation resulted in a mania. Accordingly, the period resulted in the escalated process of the tulips.

Additionally, the investors were willing to pay high prices for the product. Further, the economic bubble occurred during the 1990s as a result of the emergence of the dot.com mania. The period experienced a massive demand for stocks concerning websites. The demand and supply factors of the investors influence the demand and supply factors. Due to the investors’ ability to control the stock prices, the situation can result in over-investment that ultimately leads to the economic bubble. Further investments may result in soaring demand that ultimately halts the mania. The presence of economic bubbles results in adverse effects on the economy. Additionally, the impact of the bubble is negative, and thus through proper investment strategies, the case can be avoided by savings. As such, a thorough analysis of the economic performance is significant to eliminate the chances of occurrence of mania and economic bubble.

How the Economic Machine Works

Ray Dalio’s presentation concerns economic patterns. The economist presents the crucial stages behind the successful implementation of economic policies. Accordingly, productivity refers to the ability of an economy to remain competitive (Dalio, 2013). Similarly, the ability of a nation to meet the demand of the citizen depends on productivity growth. Further, to foster the growth of an economy, the employee output is crucial. The employees in the nation must result in the production of more products. Similarly, productivity growth is crucial for the projection of economic growth. Further, the factor also provides the platform for the analysis of the demand and supply. Countries are also able to formulate the policies regarding business stages and the GDP. Accordingly, the economist talks about two business stages. The economic principles must cover the short term business debt cycle, which describes the period where immediate liabilities that a company owes within a year.

On the other hand, the long term debt cycle describes the period when the organizational loan that has accrued over more than one year. As such, the economist indicates that the two stages of business debt are significant in the financial operations of an economy. The marketing process involves both producers and consumers. Similarly, the market players form the primary building blocks of an entire economy.

Further, the economist notes that the nation’s credit is under the control of the central bank. The amount of credit within a nation’s transactions forms a significant component of the economy. Thus, the Central Bank System has the responsibility of implementation of policies that regulate the credit levels.

Further, the video also illustrates the different stages that are involved in economic growth. Productivity growth and credit affect the economy in the long term and short term capabilities, respectively. As such, borrowing leads to the creation of both short time and long term debt cycles. Further, the debt level indicates the state of a particular nation. As such, societies with a large number of debts reduces spending power. Consequently, the reduction in expenditure results in fewer funds for the citizens. Ultimately, high debts create low credit scores and, similarly, the decline in economic wealth. As such, depression must be implemented in such a case to avert inflation. The process entails the reduction in expenditure, minimization of debt, and wealth redistribution. As such, the central bank system has the responsibility of wealth creation through the reduction of debt levels.

The Business Cycle

According to the video, the business cycle indicates the variations in a country’s GDP over time (Khan Academy, 2012). The period also describes the stages through which an economy undergoes in the quest to maximize the output. Similarly, the sequence consists of phases. Expansion is an economic process that entails a reduction in the unemployment rates and increases in the GDP (López-Salido et al., 2017). The peak point refers to the condition where the increase in economic growth halts and there is a decrease in the output. Further, the recession period comprises of reduction in production and inflation in the unemployment levels. The trough stage indicates the end in recession and consequently, an increment in the production.

The potential national output refers to the production capabilities as a result of useful resource utilization. The possible output aid sin the prediction of the overall economic growth. The difference between the potential output and actual output helps in the determination of the demand and supply. High actual output levels result in increased demand. As such, the situation results in economic overheating that ultimately results in a recession. The potential output has a direct impact on the GDP level. Effective utilization of the available resources results in the similarity between the employment and unemployment rates (Jordà et al., 2017). Increasing the output gap also lower the unemployment rates.

There are two types of unemployment levels. The actual and natural levels. The video also indicates that the expansion levels does not necessarily result in economic e growth. Expansion rates increase during the recession period. However, during the case, no economic growth is recorded. On the other hand, the continued increase in potential growth results in economic growth. Additionally, effective utilization of the resources fosters the rate of growth of the economy. Thus, the changes in the economic trends of a given nation depend on the prevailing business factors.

References

Dalio, R. (2013, September 22.). How The Economic Machine Works by Ray Dalio. [Video File]. Retrieved from https://www.youtube.com/watch?v=PHe0bXAIuk0&feature=youtu.be

Dassios, A., & Li, L. (2018). An economic bubble model and its first passage time. arXiv preprint arXiv:1803.08160.

Jordà, Ò. Schularick, M., & Taylor, A. M. (2017). Macro financial history and the new business cycle facts. NBER macroeconomics annual, 31(1), 213-263.

Khan Academy. (2012, March 1.). The Business Cycle. [Video File]. Retrieved from https://www.youtube.com/watch?v=TXrOpjG4dUs&feature=youtu.be

López-Salido, D., Stein, J. C., & Zakrajšek, E. (2017). Credit-market sentiment and the business cycle. The Quarterly Journal of Economics, 132(3), 1373-1426.

Singh, P. (2015, May 4.). What Causes Economic Bubbles? [Video File]. Retrieved from https://www.youtube.com/watch?v=I5ZR0jMlxX0&feature=youtu.be