Terms Beginning With 'e'

Economic Depression

What is Depression in Economics? 

In economics, depression is referred to as a more severe form of the global recession, reflecting a prolonged and major downswing in economic activity. Depression is commonly characterised by widespread unemployment, sharply down industrial production, significant falls or pauses of growth in construction activity, and massive cutbacks in international trade and capital transfers.

The Reserve Bank of Australia (RBA) defines depression as a broader version of recession, both in terms of duration and scale. As per the Central Bank, the scale and duration of depression imply that there are usually adverse economic outcomes that are experienced in several countries across the world.

Unlike any minor business contractions that usually occur in a single country independent of economic cycles in other countries, depressions have generally been worldwide in scope. Consequently, some definitions of depression state it as a terrible recession that stems in one or more economies.

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What is the Difference Between Recession and Depression?

The 33rd US President, Harry S. Truman gave a very famous quip - “It’s a recession when your neighbor loses his job; it’s a depression when you lose your own.”

The distinction between recession and depression generally boils down to the duration and depth of an economic downturn. While a recession is commonly defined as a substantial fall in economic activity lasting for more than a few months, a depression is noted when an economic downturn lasts for years.

A recession is usually characterised by considerable declines in employment, industrial production, investments, construction, international trade, stock market values and household income and spending.

On the flip side, the depression is described by a period during which major macroeconomic indicators such as employment level, stock market values and business activity plummet severely or stay at a very low level for a sustained period. In other words, depression is more destructive than a recession, with its effects lasting for decades, as witnessed in the 1930s Great depression.

In addition, the recession is a more localized scenario, while depressions generally have a global reach. Some economists also define depression as a period of output decline for over two years, a fall in output of 10 per cent or larger and a peak in the unemployment rate to about 20 per cent.

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How Can We Trace Back the Origin of the Great Depression of 1930s?

Fortunately, the world witnessed only one economic depression in modern times, which was the ‘Great Depression of 1930s’ that lasted from 1929 to around 1939.

While the Great Depression sprouted in the United States (US), it caused dramatic falls in output, acute deflation and severe unemployment in almost every country of the globe. Recalled as the worst economic slump in the history of the US and the industrialized world, the event induced around 30 per cent fall in the real GDP and over 24 per cent surge in the unemployment rate of the US.

The severity of this depression became more apparent when it was compared with the US’ next worst recession – the 2008 Global Financial Crisis – during which the nation’s GDP fell by 4.3 per cent, while unemployment rate peaked below 10 per cent.

The economic depression of 1930s also delivered a heavy blow to the Australian economy, with its GDP tumbling by about 10 per cent and the unemployment rate peaking to around 30 per cent in 1932.  However, the RBA believes that Australia was less impacted by the Great Depression than some other economies in terms of social and economic consequences.

What were the Key Causes of the 1930s Great Depression?

There is no single event that triggers economic depression, while it is an outcome of a multitude of factors, ranging from stock market crashes to deflation. To gain a better understanding, take a look at five key reasons that sowed the seeds of the Great Depression of 1930s:

 

  • 1929 Stock Market Crash: Economists cite the stock market crash of 1929 as one of the primary causes of the Great Depression. Remembered now as the “Black Tuesday”, the stock market downturn occurred on Tuesday, 29th October 1929, wiping off over USD 40 billion dollars of stockholders’ wealth within two months since the market crash.
  • Bank Failures: The stock market crash sparked about thousands of bank failures in 1930 amid dwindling confidence in the Wall Street and American banks. With banks going bankrupt, the demand to withdraw money from banks exceptionally increased, stimulating further collapses. Some scholars believe that this problem was further aggravated by the Federal Reserve, which deliberately increased interest rates and reduced money supply to retain the gold standard.

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  • Deceleration in Consumer Spending: With tight credits, diminished savings and fears of additional economic woes picking up steam, spending by consumers came to a standstill. This resulted in diminished production and a subsequent fall in the demand for labour force. The mounting layoffs further stimulated a ripple effect, triggering an additional plunge in consumer spending and business investment.
  • Reduced International Lending: In the late 1920s, higher interest rates induced a sharp decline in lending by American banks to foreign countries, contributing to slowdown effects in some borrower nations like Argentina, Germany and Brazil. These contractionary effects resulted in an economic downturn in these nations even before the onset of Great Depression in the US.
  • Smoot Hawley Tariff: In an effort to protect domestic industry, Congress passed the Tariff Act of 1930, termed as Smoot Hawley Tariff, which involved the imposition of a record level of tax rates on a wide array of goods imported by the US. The act prompted retaliation by American trading partners, which further levied tariffs on goods produced by the US, causing a fall in international trade.

In addition to these factors, the drought that arose in the Mississippi Valley during 1930 – the Dust Bowl - is also believed to be a contributing cause of the economic depression.

What are the Warning Signs of an Economic Depression?

Evidence shows that economic depression exhibits several warning signs over sustained period prior to its arrival! With that said, let us quickly discuss some major threat signs of a looming depression:

  • Mounting Public Debt Levels: As soon as a disaster kicks in, the Government intensifies fiscal spending to help the economy stand back on its feet, as evident from the COVID-19 crisis. Consequently, the fiscal deficit and public debt levels surge, potentially resulting in bankruptcies and mass defaults.
  • Sustained Losses in Stock Market: The movement in stock prices deserve a closer attention while gauging the economic outlook. A sustained fall in the stock prices appears to be a core indicator of the softer profits likely to be earned by companies. Tumbling stock prices can eat up the savings of average consumers, inducing a decline in consumer spending.
  • Growing Unemployment Rate: Soaring unemployment levels witnessed over prolonged periods is one of the leading indicators of an approaching recession or economic depression. Consumers tend to lose their purchasing power if job losses surge, stimulating lower demand for goods and services in the economy.
  • Increasing Inflation: While some level of inflation is acceptable, too much inflation discourages consumer spending, triggering a sharp plunge in demand and production. Rising inflation can also provoke the Central Bank to increase interest rates, which can further deter businesses from taking loans and choke economic growth.
  • Plunging Property Sales: The property market usually flares better when an economy is in a good spot. So, when property sales or new housing construction projects plummet, it usually indicates deteriorating consumer confidence, raising concerns of economic downturn.

What are Feasible Responses to an Economic Depression?

The magnitude of an economic depression is unprecedented and requires a range of solutions to wade through the crisis. Some of the key measures adopted across the world to deal with an economic depression, include:

  • Fiscal Policy: This reflects an increased fiscal spending by the Government and an expanded investment in new infrastructure to create jobs and stimulate consumer demand.
  • Monetary Policy: This reflects a reduction in interest rates by the Central Bank to make borrowing cheaper, quantitative easing approach and the use of helicopter money to hand cash to citizens.
  • Mortgage Relief: This reflects the support provided by banks to consumers and businesses in terms of mortgage relief to enable them to survive through the crisis.

What is an Absolute Advantage? Absolute advantage is one of the key macroeconomic terms, which is based on the principles of Capitalism and is often utilised in international trade-related decisions. Absolute advantage refers to the competence of a company, region or country to produce goods or services in an efficient manner compared to any other economic entity. The efficiency in production can be achieved by: Production of the same quantity of good or services as produced by other entity by utilising fewer amount of resources Production of a higher quantity of good or services as produced by other entity by using the same amount of resources What is the Significance of Absolute Advantage? Different countries or businesses possess a different set of ability owing to their location, soil composition, weather, infrastructure, or human resource skills. When applied in the right direction, various factors may pan out to offer more cost-effectiveness and hence build absolute advantage of the entity in comparison to others.  The absolute advantage remains one of the critical determinants for the choice of the goods or services to be produced. Absolute advantage in a particular area often translates into profitability in the area. The profit margin increases by the achievement of cost efficiency, allowing the entity to ensure higher profitability over the competitors.  For example, let us assume that the US can produce ten high-quality aircrafts utilising a specific amount of resources. China, on the other hand, can build 6 similar quality aircrafts using the same amount of resources. Thus, in the production of an aircraft, the US holds Absolute Advantage Let’s say the US has the ability to manufacture a certain amount of steel using 10 tonnes of iron ore. China, on the other hand, can produce the same quantity of steel using 8 tonnes of iron ore.Here, China here holds Absolute Advantage in the production of steel.  How Countries Build Absolute Advantage? While natural conditions, which include climatic factors, geometry, topography, cannot be altered for achieving absolute advantage, the countries use the underlying factors strategically in their favour. Furthermore, factors of production are focused at by many companies or nations for building absolute advantages.  Some of the strategies for building absolute advantage includes: Development of Technological Competencies- The implementation of innovative or latest technological innovations allows the entities to lower their production cost, facilitating absolute advantage.  Enhancing Skills of Human Resources- The improvement in the cost-efficiency, along with the quality of the products, is targeted through imparting varying skill development programs. Many countries subsidize or aid the apprentice or labour training for enhancing the absolute advantage in trade.  Improving Infrastructure- The infrastructure enhancement in the form of road, telecommunications, ports, etc. can be useful in enhancing the cost-effectiveness across different industries.  What Do We Understand by Comparative Advantage Vs Absolute Advantage? Evaluating the comparative advantage introduces the concept of opportunity cost, which is the deciding factor to determine the production of particular goods or services. Opportunity cost refers to the potential benefits associated with the next best possible alternative which is missed out when one option is chosen over another.  The Absolute advantage simply considers the capability of a business or region to deliver goods or services in the most efficient manner. The Comparative Advantage, however, also takes into account the benefits that are forgone if an entity decides for production of a particular product or services.  Comparative advantage, based on the notion of mutual benefits, is often used in international trade deals. The Comparative advantage has been the major factor driving the outsourcing of services in search of cheap labour.  Understanding through an Example For instance, country A can produce ten televisions with the same amount of resources with which it can make 7 laptops. The opportunity cost per television is 7/10 or 0.7 laptops. Meanwhile, the opportunity cost per laptop is 10/7 or 1.42 television.  It highlights that country A is forsaking the production of 0.7 laptops if it is deciding to manufacture one television. On the other hand, it is missing out the opportunity to manufacture 1.42 televisions for every single laptop manufactured.  Now, say Country B’s opportunity cost for producing a television is 0.5 laptop, and that of producing laptop is 2 televisions. Then, country B will have a comparative advantage in making televisions, and country A will have comparative advantage in producing laptops. It has to be noted that despite country A having absolute advantages in both the products, it would be mutually beneficial for both the countries if country B produces television while country A produces laptops. Do You Know About Absolute Advantage Theory by Adam Smith? The concept of Absolute Advantage was indicated by Adam Smith in his book called ‘Wealth of Nations’ which focusses on International trade theory. Adam Smith, in his book attacked on the previous mercantilism theory, which mainly stressed for economies to maintain trade surplus in order to command power.  The Absolute Advantage theory considered that the countries possess different ability with respect to the production of varying goods or services. It argued that it is not necessary that a state may hold an absolute advantage in the production of all goods, and here the relevance of trade comes into play.  It advocates that countries should produce those goods over which they hold a competitive advantage. It would allow the countries to make the same amount of goods using few resources or in less time. The theory propagates the relevance of trade for economic sustainability.  What Are the Limitations of the Absolute Advantage Theory? The assumptions used in the Absolute Advantage Theory by Adam Smith may limit the application in real bilateral trade. The limitations of the theory by Adam Smith include: Smith assumed that the productive capabilities of a country could not be transferred between the two countries. However, in practical terms, the competitive scenario aids the nations to acquire new capabilities and acquire new resources, especially in the technological and human resource skill aspects.  The two-country trade which was used as a basis for the theory does not consider the trade barriers levied. The present scenario, however, is strikingly dominated by trade wars between economies. Nations impose huge tariffs, import duties and other type of barriers to promote local manufacturers.  Absolute Advantage theory assumes that the trade between the two nations will take place only if each of the two economies holds an absolute advantage in one of the commodities traded. However, in general, countries despite not holding absolute advantage are engrossed in international trade, boosting their economic setup.

Ability-to-Pay Taxation The neoteric trending concept in which the tax is levied as per the taxpayer’s economic ability to pay. It is based on the concept that a person who earns more should pay more taxes and the one earning less should pay less.  

In the recent past, the absolute return approach of Investing has turned out to be one of the fastest-growing investment strategies worldwide. A lot of financial advisors talk about such investments providing absolute returns. So, what exactly are the “Absolute Returns” and are they are promising? What is meant by Absolute return? Absolute return computes the increase or decrease, in an asset over a period of time, as a proportion of the original investment amount. The focus here is only on that specific asset or portfolio and not related market events. Absolute returns only consider the price movement for any specified time period. Absolute return, reckons an investment’s performance without considering the expanse of time for which investment was committed. Absolute returns can be computed for a quarter, semi- annual, annual period, 3-year duration or more. Absolute Returns are independent of Market movements and thus do not draw relative comparisons. It is one of the most commonly used investment performance metric in Hedge Funds and Mutual Funds. How to compute Absolute return? Suppose an investor Mr. Rich, invested AUD 50,000 5 years back, and the current value of his investment is AUD 75,000. The Absolute return on Mr. Rich’s investment would be 50 %, calculated using- Copyright © 2021 Kalkine Media Pty Ltd Copyright © 2021 Kalkine Media Pty Ltd So, Copyright © 2021 Kalkine Media Pty Ltd Absolute returns are just returns from point of time to other. The notion of an 'absolute return' seems very attractive to get investors’ attention as it ignores the relative market movement and promises an appreciation with zero correlation to markets. Anyhow, Absolute Return technique of computing investment yields is an apt way of calculating return on investment, predominantly in the early stages. There are numerous other types of return metrics an investor can look for later on. Major 4 types mattering most to investors being –  Absolute Return, Relative Return, Total Return & CAGR. What is the difference between Absolute Return, Relative Return, Total Return & CAGR? Absolute return refers to the gain/ loss in a single investment asset/ portfolio but to comprehend how their investments are acting relative to various market yardsticks, relative return is taken into consideration.   Relative return is the excess or deficit an asset achieves over a timeframe matched to a market index. Benchmark Return – Absolute return, gives the Relative return also called sometimes as alpha. Example, if S&P index gives a 10% return during a given period and one’s investment portfolio gives an absolute return of 12% then relative return on investment is positive/ excess 2%. Total returns take into account the effect of intermittent incomes as well as dividends. For example, in an equity investment of AUD 200 having current value AUD 240, the company also declares a dividend of AUD 10 during the year. Total returns will take into account this $10 dividend too. Thus, Total returns on the investment of AUD 200 now will be 25.00% = {(240+10-200)/200} x 100 Absolute and Total returns are easy to calculate as performance metrics, but the real challenge is when comparisons are drawn based on time period of return. Here comes in CAGR, it takes into account the term of the investment too, thus giving a more correct and comparable picture. It is computed as: CAGR (%) = Absolute Return / Investment period (equated in years) Consider for example, two investment options: One where investor earns absolute returns of 10% in 24 months and another where investor earns 5% absolute returns in 9-month duration. So, CAGR would be- For option one: CAGR = 5.00% i.e.  10%/2 (24 months/12 months is equals to 2 years) For option two: CAGR = 6.66% i.e. 5%/0.75 (9 months/12 months is equals to 0.75 years) What’s wrong with just measuring investment performance using Absolute Returns? Absolute returns will only tell an investor how much his/her investments grew by; they do not tell anything about the speed at which investments grew. When people talk about their real estate investments and say, “I bought that house for X in the year 2004. It’s worth 4X today! It has quadrupled in 17 years.” This is an application of absolute return. The drawback here is that it takes into account only the capital appreciation and doesn’t draw comparison with options having different time horizons. Investors can rely on this measure of investment performance only if they are looking for higher returns, without bothering how fast they were generated. Absolute return also doesn’t convey much about an investment compared to relative markets. Then, why do Hedge Fund/ Mutual Fund Managers choose an Investment strategy based on Absolute returns? Absolute returns should be used at times when investors are willing to shoulder some risk in exchange for a prospective to earn excess returns. This is irrespective of the timeframe and Fund administrators who measure portfolio performance in relation of an absolute return typically aim to develop a portfolio that is spread across asset categories, topography, and economic phases. They are looking for below mentioned points in their portfolios- Positive returns- An absolute returns approach of investment targets at producing positive returns at all costs, irrespective of the upside & downside market movements. Independent of yardsticks- The returns are in absolute terms and not in comparison to a benchmark yield or a market index. Diversification of portfolio- With the intention of distribution of risk, among different investment options producing positive returns in diverse ways a mixed bag of absolute return assets give a diversified investment portfolio. Less volatility- The total risk of investment is spread across the different asset held in such a portfolio. Ensuring less overall volatility in collective returns. Actively adjustable to market movements– Usually, investments look for positive returns with zero market correlation. Market shares a negative correlation with absolute return investments and vice versa. In any investment atmosphere, there are varied investment strategies and goals. Absolute return investment strategies are looking to avoid systemic risks using unconventional assets and derivatives, short selling, arbitrage and leverage. It is appropriate for investors who are prepared to bear risk for short and long-term gains.

What is Data Analytics?  Data Analytics involves a set of quantitative and qualitative approaches and processes that can be used to determine useful information for business decision-making. The process involves various patterns and techniques, including: extracting a raw database, and categorising it to identify and analyse the behaviour, relation and connection of the results.  The ultimate goal is to acquire valuable information in order to make decisions for businesses’ benefit and productivity.  In today's competitive times, most companies chalk out their business plan with the help of data analytics. With organisations becoming customer-service oriented, data analytics has become a critical tool to reach the target audience in an effective manner while understanding their requirements. Once data is collected, it is analysed and stored according to organisations’ requirements.  The data analysis process has multiple layers involved, and its diverse modules are not just used in businesses but also in science and social science fields. Rather than making decisions based on just available information, one can utilise data analytics in examining the data in standard ways and churning out the results from it.  It has been observed that companies generally make decisions based on past references and future outcomes. Data analytics appears advantageous in providing useful information towards this end.  Why do Businesses Need to Use Data Analytics?  Many data analytics’ tools and softwares are readily available these days. These systems use resources, such as machine learning algorithms and automation.   Data scientists and analysts are counted amongst the leading career options as well. These professionals use data analytics techniques while researching and presenting useful information for businesses to increase productivity and gain. The process helps companies understand their target audience and determine effective ways to cater to their needs. Data analytics can further be used to design strategies in marketing campaigns and promotions and also evaluate its results.  Data analytics is primarily used in business-to-consumer (B2C) processes to boost business performance and improve the bottom line. There are data collection firms which gather consumer information and provide it to the businesses so that the companies can effectively influence the market. The collected data is not only used to understand and impact consumer behaviour but also determine market economics and its practical implementation.  The data used in the process can be either be data collected in the past or newly updated data. There are various methods to manage consumer and market information. It may come directly from the customers or potential customers or can be purchased from the data collection vendors. The data primarily includes audience demographics, behavioural patterns and expense threshold.  How Can Data Analytics be Effectively Used in Business Processes? Data analytics is an ever-evolving technique. Earlier, the data was collected manually, but with the rise of internet and technology, data is now collected online with the help of search engines and social media platforms. Subsequently, the information is analysed through available software.  Here is a list of some key steps businesses can follow to leverage the benefits of data analytics: Set up crucial metrics: This step reduces the guesswork and provide data-based insights to the businesses. Before embarking on the data analytics process, it is vital to determine the goal for your business. Analysing customer data helps in understanding conversion rate, consumer spending ability, demographics etc. The results of the analysis can support the businesses while making decisions in launching an advertising or marketing campaign. Similarly, the unwanted data can be erased from the database so that the brands can focus on their right target audience. The relevant metrics will change the course of the company and push it in the right direction. Moreover, once your key metrics are set, even when the market conditions change in the future, you can adjust the metrics according to the requirement and achieve the results. Set a clear module: It is important to examine the data correctly by avoiding common mistakes. An ambiguous path can produce confusing insights while wasting time and energy of businesses.  Therefore, it is recommended to draw a clear goal in order to achieve actionable insights. The data, when collected from different sources, need to be merged accurately in the analytics model. Businesses can modulate their data analytics systems either manually or through automation. There are various data modelling practices available in the market. The best use of these techniques can simplify the process of modelling complex data.  Data visualisation: Once the relevant data is collected, and the modules are set to analysis, visualisation of that data will assist in understanding the information correctly. When the businesses have an acute knowledge of what their target audience wants, they can then focus on strategising advertisement and content, which matches the consumers' interest.  It is the critical step in the data analytics process to distinguish insights from information.  Not everyone is comfortable dealing with numbers. Hence, ensuring that key stakeholders understand essential points and information can be displayed in a visually appealing format seem crucial to capitalise on data effectively. Right tools to implement insights:Having access to data and insights can get overwhelming. However, the information is worthless if the businesses are unable to implement it successfully. While it is important to collect the data and set critical metrics and modules to analyse it, it is also imperative to translate the data into practical actions. The eventual goal is to improve sales or grow profits. It is ultimately in the marketers' hands to transform the gained insights into a successful implementation. The consumers' insights should be incorporated while establishing a marketing plan and at all decision-making steps. 

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