Monday, August 8, 2011

Economic Bubble and E-commerce

Economic bubble arises due to rapid increase in demand of goods. It increases output and employment rate from real level. It has both positive and negative effects. Positive effects are such as higher employment that helps to improve standard of living. It is also helpful to increase earnings of the government as higher income leads to higher tax receipts (Riley, 2004).

At the same time, economics bubble also has negative effects. It leads to financial crisis in the economy. In this situation, investing pattern in non-productive asset increases as supply of money increases (Saccomanni, 2008). A person spends more money for the consumption of durable and non-durable goods due to higher income. This spending creates inappropriate allocation of monetary resources that brings economy at saturation point. It reduces development and expansion of the economy.

On the other hand, businesses have a tendency to increase their production capacity to meet the increased demand of consumers that increases workforce expenses and declines organizational profitability (Riley, 2004). To maintain their profit margins, business increases the price of their products and services. High price creates high inflation rate and it contributes in financial crises. In addition, excess money supply also reduces interest rates. Companies take excess debt from banks for capital investment that also brings a sudden boom in the economy (Raines & Leathers, 2008). It creates financial crises as its make them unable in repaying the debt. This activity leads to bankruptcy and insolvency of the corporations.

E-commerce is a part of e-business that includes buying and selling of consumer products over various means of communication such as telephone, internet, fax etc (Li, 2007). E-commerce has significant role in economic boom. Nowadays, business organization can sell their product around the world through internet (Bidgoli, 2002). It helps in increasing their revenue that leads to economic boom but it also increases the fraudulent activities of business organization that creates economic bubbles. All these activities are creating fake growth of organization as well as the economy that may force the economy in crisis situation.

At the same time, e-commerce provides unique platform of shopping but it also increases purchasing habits of the consumers (Thanasankit , 2003). It changes the investing pattern of consumers as the investment in durable and non-durable assets that are not productive assets increases. It creates wealth for organizations for short-time, but for long-term; it is not beneficial for the organization and economy as well.

On the other hand, E-commerce provides a platform that has no geographical limits. It increases complexity for the businesses. Government provides guideline regarding e-business activities. These rules and regulation are providing a systematic framework for e-commerce. It prevents the fraudulent activities of business organization and also helps to prevent sudden boom in the economy (Loh, 2006). At the same time, these regulations also decrease credit risk of business organization as it sets limits of credit for them. Beyond that limits, consumer cannot purchase goods on credit (Saunders & Allen, 2002). It helps to reduce fake sales of business as this can be contributed in sudden economic boom.


Bidgoli, H. (2002). Electronic commerce: principles and practice. USA: Academic Press.
Li, F. (2007). What is e-business?: how the Internet transforms organizations. Great Britain: Wiley-Blackwell.
Loh, P. (2006). E-commerce for the global markets. Singapore: Knowledgeworks Consultants.
Raines, J.P., Leathers, C.G. (2008). Debt, innovations, and deflation: the theories of Veblen, Fisher, Schumpeter, and Minsky. Great Britain: Edward Elgar Publishing.
Riley, G. (2004). AQA AS Economics Module 1&2 Digital Textbook. Tutor2u Limited.
Saccomanni, F. (2008). Managing international financial instability: national tamers versus global tigers. Great Britain: Edward Elgar Publishing.
Saunders, A. & Allen, L. (2002). Credit risk measurement: new approaches to value at risk and other paradigms (2nd ed.). USA: John Wiley and Sons.
Thanasankit, T (2003). E-commerce and cultural values. UK: Idea Group Inc (IGI).