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Tag: economic growth

  • What Are Economic Bubbles, How To Avoid Them?

    What Are Economic Bubbles, How To Avoid Them?

    The term economic bubble or often also referred to as a speculative bubble or financial bubble. This is one thing to watch out for, especially when you invest.

    Determining investment instruments is not an easy thing. Of course, everyone hopes that the chosen investment instrument can increase in price so that it will provide benefits in the future.

    There are many things that must be considered so that you are not wrong in choosing an investment instrument. One thing that is quite important and needs to be watched out for is the phenomenon of the economic bubble.

    Because this phenomenon can make the value of the investment instrument you choose fall very deeply. So instead of getting a profit, you will actually experience a large amount of loss.

    Understanding the term bubble economy

    The phenomenon of economic bubbles has occurred in many countries and has a long history. The occurrence of this phenomenon makes many people suffer losses in very large numbers.

    The term economic bubble itself refers to the condition of rising asset prices to become unrealistic. Furthermore, the price of these assets experienced a sharp decline in a very fast time.

    So that people who have bought assets at high prices, suffer losses due to the decline in prices. This phenomenon can occur in various assets such as stocks, property and other types of assets.

    The naming of this phenomenon takes from the reality of bubbles that easily rise to the top. But at a certain point, the bubble will burst very quickly.

    This illustrates how the price of an asset can soar to the point of being unrealistic. Until in the end the value of the asset broke and the price fell to a very low level.

    The term economic bubble has been known by economists as something to be wary of. Because the occurrence of this phenomenon will have an influence on macroeconomic conditions.

    There have been many examples of economic crises caused by the economic bubble phenomenon. One of them is the housing bubble that occurred in 2005 – 2008 in the United States.

    In that year, house prices in the United States experienced a very high increase. Until finally in 2008, the bubble burst and caused an economic crisis.

    Until finally the American government had to bail out or provide bailout funds to help some companies keep operating. Without the bailout funds, there will be massive layoffs.

    Understanding Some of the Causes of Economic Bubbles

    In general you have understood the term bubble economy. In fact, this phenomenon refers to the movement of the price of an asset that increases and then at some point will break.

    Economists still do not know the exact cause of this phenomenon. However, there are several things that may be the cause of this phenomenon, namely as follows.

    Excessive Liquidity in the Financial System

    The first thing that may be the cause of an economic bubble is excessive monetary liquidity in the financial system. Simply put, the ease of getting a loan can be the cause of an economic bubble.

    Again remember that the term bubble economy refers to a condition in which asset prices increase to the point where it becomes unrealistic. The ease of getting a loan is one of the causes of this.

    With the ease of getting a loan, the purchase of an asset will increase. According to the law of supply-demand, more demand will make the price of an asset increase.

    At a certain point, the price of the asset becomes unaffordable so it cannot be sold. As a result, the owners of assets will make sales at low prices.

    This is done so that they still get income even though they have to suffer losses. Because on the other hand, they still have debts that have the potential to default.

    Investors’ Speculative Behavior

    One of the possible causes of the economic bubble phenomenon is the speculative behavior of investors. Because it refers to the term economic bubble, that in fact an increase in asset prices is an expected thing.

    The higher the potential increase in the price of an asset, the more attractive it will be. Because these assets are predicted to be able to provide huge profits in the future.

    Therefore, an asset that is considered to have a high price in the future must be in great demand. So that more and more investors invest in these assets and make the price increase.

    However, if the price increase is not accompanied by an increase in the intrinsic value of the asset, it will have a bad impact. Because in the end, people will realize that the asset price is too expensive.

    So the demand for these assets will decrease which will also lower the price. So investors who have bought assets at high prices will experience losses.

    The Greater Fool Theory

    One theory that is considered to be the cause of the economic bubble is the greater fool theory . This theory is in line with the term economic bubble which describes a significant increase in asset value.

    In general, this theory states that price increases occur when someone can sell an asset that is overpriced to a “stupid” person. Then the “stupid” person will sell it back to the “stupider”.

    This will continue until the price of an asset becomes very high. Until finally the last person could no longer find a “stupider” one to buy the asset.

    So that the bubble will burst and make asset prices that were very high fall very low. So the last “stupider” person will receive a large amount of loss.

    Extrapolation

    Extrapolation is the behavior of equating historical data in the past with the future. This could be the cause of the economic bubble phenomenon considering that the term economic bubble is closely related to price increases.

    Indeed, one way to predict the value of an asset is to look at historical data. However, historical data is not the only data because there are other aspects that also need to be taken into account.

    Extrapolating behavior does not take this into account. They only see that the value of an asset in the past can rise to a very high which may also happen in the future.

    At some point, investors will realize that these assets cannot provide the returns as in the past. So that the bubble burst was marked by a decrease in asset prices.

    Lack of Community Financial Literacy

    It is undeniable that today many people are starting to realize the importance of investing. Unfortunately, awareness of investment is not accompanied by good financial literacy.

    In fact, one of the possible causes of the economic bubble is the lack of public literacy regarding the financial world . In fact, there are still many people who do not know the term economic bubble.

    This lack of literacy or knowledge will certainly affect people’s decisions to invest. One of them is in determining the right instrument and can provide benefits in the future.

    People who are minimal in financial literacy tend to make decisions on a whim and without careful consideration. As a result, they are more easily trapped in the economic bubble phenomenon so that they will get losses in the future.

    Tips to Avoid This Phenomenon

    After understanding the term economic bubble and its causes, of course you need to avoid this phenomenon. Because the losses that can be received due to the economic bubble phenomenon can be very large.

    There are several ways you can do to avoid this phenomenon. Here are some tips that can be done so as not to get caught in an economic bubble.

    Perform Fundamental Analysis

    One of the techniques in investing is fundamental analysis. This technique is done by choosing investment instruments that have good fundamental values. Of course, the fundamental value must be in line with the asset price.

    Fundamental analysis techniques are usually used in stock selection. This method is done by looking at the company’s performance and assessing whether the stock price is in accordance with that performance.

    But you can apply fundamental analysis techniques not only to stocks. Various other assets also have a fundamental value or intrinsic value on which the price of the asset is based.

    Given the term economic bubble is an increase in the value of prices to be unrealistic, then it doesn’t matter as long as the price increase is reasonable. This means that the price increase occurs because the intrinsic value increases.

    Don’t follow

    One of the problems faced by investors, is the fear of making decisions. So many investors prefer to follow the steps or decisions of other investors.

    This is what makes signaling groups very popular  because it makes investors not have to think. The decision to buy or sell an asset simply follows the signals given in the group.

    Whereas decisions that only follow the words of others are very vulnerable to bad effects. Because the decision could be wrong and was done to increase the price of a particular asset.

    People who are not familiar with the term bubble economy are often used for things like this. When the bubble has burst, then of course the one who feels the loss is yourself.

    Improve Financial Literacy

    Improving financial literacy is a must to avoid the economic bubble phenomenon. Apart from exploring the investment world, you also need to learn other things such as financial management and macroeconomics.

    Because basically, economic activities around the world are interconnected. For example, economic conditions in the United States can have an impact on the economic conditions of other countries.

    In addition, it is very important for you to study the economic history of the world. So you can take lessons from history and use them for consideration in the present.

    Moreover, the term economic bubble itself is not new. There has been a lot of history from various countries in the world that you can use as a lesson to be able to avoid this phenomenon.

    Avoid Excessive Desire (Greedy)

    One of the problems that must be avoided by investors is greed. Because greed will make you want the maximum profit to ignore various aspects that must be considered.

    Especially now that there are many investment instruments that promise too sweet but end up losing. Excessive desire or greed will encourage you to get stuck in such an investment instrument.

    Usually when feelings of greed arise, then someone will forget the term economic bubble. When they see an asset experiencing a rapid increase in price, they buy it without thinking.

    As a result, when the bubble burst, they were trapped because they had bought at a high price. Even worse, they can’t sell the assets, so they lose all their investment capital.

    One of the things that investors should be wary of is the economic bubble. Especially considering the term economic bubble that makes people suffer huge losses.

  • Understanding the Meaning of Economic Bubbles

    Understanding the Meaning of Economic Bubbles

    There is a phenomenon in economic studies called economic bubbles or bubble economy . This phenomenon occurs in many countries and has a long history. In this article we will study the general definition of a bubble economy or economic bubbles and some of the events in which the phenomenon of economic bubbles occurs.

    According to its basic concept, economic bubbles or bubble economy refers to a situation where the price of a product or asset in a certain market segment experiences an unusual or unnatural increase in value/price, and occurs in a relatively fast time.

    There are many examples of economic bubble phenomena that occur and involve different economic sectors, including the housing sector or better known as housing bubbles and the stock market or stock bubbles .

    In its development, there have been many studies that examine more comprehensively the concept of the bubble economy , including the question of what is meant by an unreasonable price increase and how to categorize time as relatively fast. However, we will not discuss this in this paper.

    The following are some examples of events that illustrate the phenomenon of economic bubbles .

    One of the classic examples of the bubble economy phenomenon occurred in the 1637’an era known as The Tulip Mania .

    Since the late 1590s, tulips have become one of the commodities imported from Turkey to the Netherlands. Later, this flower became phenomenal in the Netherlands and became one of the trendsetters , especially as a decoration on clothing. Because of the high charm of tulips in the eyes of the public, the demand for these flowers soared rapidly with increasing public demand, until its peak in the early 1637’s.

    The high demand, which is not matched by the availability of tulips, has made the price of tulips soar to the equivalent of 40 times the average salary of Dutch workers per year. Unfortunately this did not last long, especially when market participants holding tulips started selling the flowers to the market and other market participants followed suit, causing the price of tulips to plummet within a month. It is said that after the incident, the price of tulips was not more expensive than the price of a red seed.

    Economic bubbles in the 1997-1998 Asian economic crisis.

    Not a few studies have stated that the 1997-1998 Asian economic crisis was caused, among other things, by the bursting of the economic bubble, considering that in the late 1980s and mid-1990s, interest rates in developing countries in the Asian region tended to be high, far above interest rates. interest offered by developed countries.

    The high interest rate is seen as an attraction by investors, resulting in a very large capital inflow to developing countries, including South Korea, the Philippines, Indonesia, Thailand, and Malaysia. As a result, the economic growth of these countries increased rapidly to be in the range of 8% to 12%.

    Even so, the high growth was solely due to the large inflows of capital, not supported by investment in the real sector and productive assets owned by these countries. In other words, the economic fundamentals of these countries can be said to be porous.

    As a result, when the Central Bank of the United States began to raise the benchmark interest rate ( Fed rate ) after being able to recover from the domestic economic recession, the flow of funds that previously existed in Asia began to move rapidly towards the US market which was considered more stable.

    In addition, the higher the interest rate ( Fed rate ), the stronger the US$ exchange rate against other countries’ currencies. These two factors led to massive capital flight from Asia. In the end, this caused a panic rush in the banking sector, when many people collectively withdrew the cash they had stored in commercial banks, resulting in the collapse of Asian currencies.

    The case of the economic bubble that hit internet-based companies ( .com companies ) in the mid-1990s to early 2000s.

    Another example of the occurrence of economic bubbles in the modern world is the period from the mid-1990s to the early 2000s. At that time technological developments entered a new phase, where there was a boom in internet-based technology companies. This period is also known as the era of The New Economy , which was marked by the emergence of internet – based companies or better known as . com companies .

    When these companies began to go public , the value of their shares skyrocketed many times over, offset by high expectations of market participants and the general public for the success of the new economic era. At that time, all issues related to the internet and online became the main topic of every conversation with optimistic tones.

    Unfortunately, all of these things are not followed by prudent company management , solid financial foundations, and optimal analysis of operating profit/loss calculations; in other words, the focus of attention is the marketing factor alone.

    Until when the United States Central Bank ( the Federal Reserve ) again raised its benchmark interest rate in the 1999-2000 range, these companies began to lose financial strength. This was exacerbated by the number of start-up companies that posted large losses in their financial statements.

    In the end, all public expectations did not materialize, and the economic bubble burst. Records say there is more than US$ 8 trillion evaporated in the market. Even big companies like Amazon.com, Cisco System, Priceline.com, to Yahoo! experienced a decline in stock prices by more than 90% (Jimenez, Alvaro, Understanding Economic Bubbles , 2011).

    Furthermore, there are several theories that try to explain the characteristics of the economic bubble, one of which is the research conducted by Thompson and Hickson.

    The study conducted by the two mentioned two types of bubbles , namely short -term informational monopoly bubbles . This type of economic bubble is usually characterized by the absence of an increase in the supply of products/assets. These bubble characteristics are also known as mini bubbles .

    These bubbles tend to occur through market manipulation mechanisms by market participants who have information about certain assets/products. With financial strength, certain market participants began to speculate on the asset. This attracted the attention of other market participants and began to hunt for similar assets, resulting in a drastic increase in the value/price of the asset in the market.

    This condition is usually unpredictable from the start and it is not known how long it will last. Therefore, this phenomenon is not accompanied by an increase in supply to offset demand .

    Furthermore, the bubble will burst when the perpetrator performs a massive asset disposal, thereby dropping the price/value of the asset.

    As we know, there are at least two behaviors ( economic behavior ) that we can find in market participants, namely those who make decisions with a long-term horizon and prioritize the fundamental factors of an asset, and market participants who focus more on short-term profits, by making purchases. asset at a low price and release it again when the price is high (market participants of this type are known as speculators).

    In this case, the phenomenon of The Tulip Mania can be categorized as short-term informational monopoly bubbles .

    Meanwhile , the next bubble is a long-term government involved bubble , which tends to last longer and is characterized by an increase in product/asset inventory.

    Bubbles like this usually occur as a consequence of taking or changing economic policies (monetary and/or fiscal) and other policies by the relevant authorities.

    However, different from the first type of bubble , here policy makers have calculated and calculated the impact of implementing the policy, both positively and negatively, thus including anticipatory steps as compensation for these impacts.

    The case of .com companies is an example of long-term government induced bubbles . This is evidenced by the growing number of .com -based companies even today, but with capitalization that is not accelerating as fast as in this case (Thompson, E., and Charles R. Hickson, Predicting bubbles, Global Business and Economic Review , Vol 8, 2006).

    In closing, the phenomenon of economic bubbles ( economic bubbles or bubble economy ) has occurred since several centuries ago until now. These bubbles can occur due to purely speculative factors, but can also be caused by the emergence of consequences for economic policies taken by policy-making authorities. **

  • Understanding Economic Growth: Characteristics, Factors and Measurement Methods

    Understanding Economic Growth: Characteristics, Factors and Measurement Methods

    The economic growth of a country is closely related to the welfare of its people which also becomes a benchmark for whether a country is in a good economic condition or not.

    Simon Kuznets himself stated that economic growth is a condition in which a country is able to increase its production based on technological progress which is accompanied by an adjustment of its ideology. The following is a more complete explanation of the Theory of Economic Growth, Starting from the understanding, characteristics, factors to the measurement steps:

    Understanding Economic Growth

    Economic growth is an increase in the value and amount of production of goods and services calculated by a country in a certain period of time based on several indicators, such as the increase in national income, per capita income, the number of workers that is greater than the number of unemployed, and the reduction in poverty levels.

    Economic growth can also be interpreted as a process of continuous change towards better conditions in the economic conditions of a country. The economy of a country itself can be said to be growing if the economic activities of its people have a direct impact on the increase in the production of goods and services.

    By knowing the level of economic growth, the government can then make plans regarding state revenues and future development. Meanwhile, for business sector players, the level of economic growth can be used as a basis for making product development plans and resources.

    Economic Growth Theory

    In its development until now there are various theories of economic growth. This theory itself appears a lot to explain the growth cycle as well as the factors that directly influence an increase in the national economy by experts. Among the many theories that have emerged, here are some of them:

    1. Neoclassical Theory

    Neoclassical theory or also known as the Solow-Swan model of economic growth because it was originally introduced by Adam Smith, then put back by Robert Solow and TW Swan. This theory states that there are three main factors that influence economic growth including capital, labor, and technological developments.

    This theory also believes that an increase in the number of workers can increase per capita income. However, without developing modern technology, this increase will not have a positive impact on national economic growth.

    2. Classical Theory

    Classical theory has developed since the 18th century. Its originator is a prominent figure named Adam Smith who stated that the economy of the population in a country will reach its highest point when using a liberal system consisting of two main elements, namely population growth and output.

    This concept was later refuted by David Ricardo who stated that population growth did not have a positive influence on national economic growth, on the contrary, it would only increase the productive workforce, thus resulting in a decrease in worker wages.

    Classical economic theory was born as the first milestone in economic thought which is used as a scientific discipline. This theory arises because of the weaknesses and shortcomings of previous economic theories.

    3. Historical Theory

    This theory was developed by a number of economists including Karl Bucher, Werner Sombart, and Frederich List with different views, but both are centered on the economic activities of society.

    According to Karl, the relationship between producers and consumers affects national economic growth, this relationship itself occurs in cities, communities, closed household levels, to the world.

    Meanwhile, Werner Sombart classifies the role of society in economic growth, from the closed economic stage, the industrial growth stage, to the capitalist stage.

     

    Factors Affecting Economic Growth

    Economic growth is a process of changing the economic conditions of a country on an ongoing basis towards a better state within a certain period of time. Find out what factors really play an important role in influencing economic growth:

    1. Natural Resources (SDA)

    Natural Resources or something that comes from nature includes soil fertility, location and composition, natural wealth, minerals, climate, water resources, to marine resources. For economic growth, the availability of abundant natural resources is very good in supporting development.

    Natural resources themselves are further divided into three types including Biological Natural Resources (resources that come from living things both from animals and plants. Examples of biological natural resources include chickens, cows, vegetables, rice, corn, cotton, wood, tea, coffee, to fish, non-biological natural resources (resources that do not come from living things.

    Examples are water, sunlight, air, soil, mining materials, petroleum, and natural gas), natural resources that can be or are recovered (Examples of these resources include animals, plants, trees, and fish, Natural resources that cannot be recovered) renewable resources (resources that are limited because they are formed by natural processes over a long period of time (petroleum, coal, and natural gas), lastly, eternal natural resources that will never run out (examples of these resources include water, air, sunlight, etc.) sun, wind, waves, tides, and geothermal).

    2. Human Resources (HR)

    Human Resources play a very important role in economic growth. Human resources or also abbreviated as HR are productive individuals who act as drivers of an organization, both within companies and institutions.

    It acts as the main element of the organization compared to other elements such as technology and capital, because it is humans who will then control these other factors. Human Resources itself is not solely calculated based on the number but rather on its efficiency. In encouraging Human Resources to work efficiently, there are several things that can be done:

    • Motivation of Human Resources (HR)  – Change and development will not occur without the awareness of each party. Therefore, motivating Human Resources (HR) is one of the things that must be done.
    • Adjust the Work to the Abilities and Interests of Human Resources (HR)  – Human Resources (HR) performance will be less productive if they accept assignments that are not in accordance with their abilities and interests. Therefore, they must be smart in choosing and determining their position according to their abilities and interests in something.
    • Training Programs  – Providing training programs to Human Resources (HR) will also help improve their skills. The training program must be well structured and must be right on target and in accordance with valid data. Guidance on valid data will then produce optimal output.
    • Periodic Evaluation of Human Resources (HR)  Performance – In controlling the performance of Human Resources (HR) within the specified period, it is necessary to have an evaluation so that they are introspective and try to improve and improve their work to maintain their position.

    Human Resource Economics can also be defined as the science of economics which is applied to analyze the formation and utilization of human resources related to economic development.

    3. Capital Accumulation

    The accumulation of capital as a supply of reproducible factors of production. Capital accumulation is the process of adding to the stock of human-made physical capital in the form of equipment, machinery and buildings. If the capital stock increases within a certain time, it is also called capital accumulation or capital formation.

    The relationship between Capital Accumulation and economic growth itself can measure aggregate capital accumulation from the gross capital formation (gross investment) minus depreciation, both of which are within the scope of the Gross Domestic Product (GDP) component.

    In the Harod-Domar model of economic growth, an increase in the saving rate allows more investment, which then leads to a higher rate of economic growth in the medium and short term.

    4. Managerial Personnel and Production Organization

    Production organization as an important part in the process of economic growth which is then closely related to the use of production factors in various economic activities. Production organization is also carried out and regulated by managerial personnel in various daily activities.

    5. Technology

    Technological change is considered as one of the most important factors in the process of economic growth, because technological change and progress is closely related to changes in production methods. It will eliminate the boundaries of time and space which then gives rise to new industries that take advantage of technological developments.

    This is what then results in economic movement, if initially the exchange of goods was done physically, now this exchange is also happening through the media of technology. Economic movements that occur later will indirectly affect economic growth.

    At the macroeconomic level, technological developments play a role in contributing to economic growth and encouraging economic development in a better direction. The development of information technology will also indirectly strengthen the competitiveness of a country in developing its economy.

    The companies in it can then increase national income which can later be used to support the welfare of its residents. Therefore, technological changes will increase the productivity of Human Resources (HR), capital, and other production factors.

    6. Political Factors and Government Administration

    Weak political and administrative structures are a major obstacle to a country’s economic development. Politics that are in an unstable condition and a corrupt government will certainly hamper economic progress.

    In addition, the social aspects of people’s lives such as behavior, attitudes, work motivation, community views, or community institutions, legal order and the composition and incorrect implementation of laws and regulations are also factors that hinder economic progress. So it does not support the implementation of economic growth. Therefore the law should be implemented in a consistent and orderly manner.

     

    How to Measure Economic Growth

    The economic growth of a country can be measured by comparing the Gross National Product (GNP) and Gross Domestic Product (GDP), in the current year with the previous year. These two benchmarks help in calculating the total output of a country’s economy.

    Meanwhile, according to Todaro and Smith (2004) there are three main factors or components that affect economic growth, namely capital accumulation, population growth (growth in population), and technological progress (technological progress).

    Meanwhile, how to measure the economic growth of a country can be used the following formula:

    Gt = ((PBDt – PBDt-1) / PBDt-1)) x100%.

    Information :

    Gt    = Economic Growth Rate

    PBDt       = PDB value period t

    GDPt-1 = GDP value of the previous period

    In addition, in encouraging economic growth, there are several factors that influence it. Among them, are human resources, natural resources, science and technology, culture and capital resources.