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Understanding global competition
Date 05-12-2013 | Views  18721



Understanding global competition

by Yogesh Bhatia | Nov 22, 2013

Before understanding global competition as a key to overcome global recession we should understand meaning of global recession.

In the United States, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is generally seen as the authority for dating US recessions. The NBER defines an economic recession as: "a significant decline in [the] economic activity spread across the country, for at least three months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales."Almost universally, academics, economists, policy makers, and businesses defer to the determination by the NBER for the precise dating of a recession's onset and end.

Major cause of global recession is financial bubble.

DEFINITION OF BUBBLE

Financial Bubbles is one of the main problems that modern economics is dealing with. Three definitions of a bubble exit. Commonly, a bubble is defined as the "part of asset price movementthat is unexplainable" by fundamentals or factors that we believe drives asset price movement.

For example, if the market does not follow predictions based upon fundamentals, we might claim that a bubble exists in the market. On the other hand, an irrational exuberance definition of abubble , as given by Palgrave's Dictionary of Political Economy, claims that it is an "unsound undertaking accompanied by a high degree of speculation".

FORMATION OF BUBBLE

Four causes of a bubble may be arrived at, namely asymmetric information, Ponzi scheme, chain letter and misprediction. A bubble can be caused in a situation of an asymmetric information. This is when a few investors have an incentive to dissemble the market. For example, in the Enron case, the management deceives the market by claiming false profits via accounting frauds. This would drive up Enron's market value. However once the fraud is discovered the asset price drops sharply causing the burst of Enron bubble in the market.

A bubble can be created by use of the Ponzi scheme. This is like the pyramid scheme in that "the first investors are repaid from the money put up by later investors who can never be repaid because the scheme has run its course and there are no more investors" (Wallace).

For example,a venture might use incoming investments to pay increasingly higher dividends.

This will drive up market expectations and draw more investors in. But, when the scheme is discovered or when increasingly higher dividends cannot be sustained by new investments, the bubble will burst.
A chain letter can also result in a bubble. This refers to a situation when all investors have
knowledge that a business has no chance of survival and its asset price will drop eventually.
However, the investors buy on the assumption that they will not be in the last wave of buyers since they strongly believe in Ponzi scheme.
One example is technology stock. Everyone knows that they are overpriced, but they invest anyway hoping that they are not the last wave of investors who will be left holding the bag.

Ultimately, a bubble can result simply from a misprediction. Prizes stray from fundamental value all the time, and no one is very clearly sure whether an asset is undervalued or overvalued.

(Farrel). In addition, "people are prone to make mistakes when fundamentals are difficult to assess, as is the case when there are major changes in industry" (Chancellor). A business might sound pretty good in the beginning, but something can always happen. In hindsight, a bubble will be created as investors act under the misprediction of the future of an organization.


- Yogesh Bhatia (cayogeshbhatia@hotmail.com), Tutor at BharatTutors.com

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