economy : Why-is-growth-in-a-certain-market-sometimes-called-a-bubble -1
Answer by Jai Parimi:
What is a bubble?
- A thin sphere of liquid enclosing air or another gas which is very unstable and bursts on slightest change in force or pressure around it.
What is bubble burst?
What is economic bubble?
- An economic cycle which is very unstable due to speculations and bursts on slightest hint of a negative news.
Why sometimes growth is called a bubble?
- Not all growth's are called a bubble. In any scenario, growth can be broadly classified into two types
- Organic Growth*: The growth that comes from real development.
- Inorganic Growth*: The growth that comes from expected growth/development in future.
- Organic growth is sustained and hence is not a cause of worry usually apart from the few impacts it makes on the resources.
- Inorganic growth usually comes from speculations of future and the problem arises when these speculations go wrong.
- As long as the speculations are in-line, The growth takes an exponential trajectory and everyone is happy and forms a bubble.
- Once, the environment changes, the pressure around the bubble changes and thus causes it to burst creating havoc in the environment surrounding the bubble.
- This is the reason why sometimes growth is called as bubble formation.
Thanks for the A2A. Hope this helps. 🙂
As an example, See the following graph
In short-term debt cycle, around highest point of cycle is a small bubble.
In long-term debt cycle, around highest point of cycle is a large bubble.
* I doubt the usage of terms Organic and Inorganic as they are usually used in business terms and perceived to have their own advantages and disadvantages. Same principles hold with economic growth also. 🙂