Economic Stability Definition Factors Indicators Examples

Economic Stability Definition

Economic stability refers to a situation where all the essential economic resources of a country are available to its citizens, and no economic swings interrupt their daily lives. It helps achieve macroeconomic objectives like reducing unemployment, balance payments, price stability, and sustainable economic growth.

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Economic disruptions alter economic stability through inflation, deficits, recession, political riots, and policy changes. Therefore, the government constantly monitors and eliminates deviations in an economy to keep it stable and growing. The common indicators include GDP, fiscal deficit, interest rates, consumer prices, etc.

Key Takeaways

Economic stability describes the state where an economy is free from various factors disrupting its smooth functioning and growth.The variables affecting stability include inflation, recession, policy changes, political situation, global market, and fiscal deficits.Maintaining stability of the economy improves job opportunities, enhances people’s living standards, contributes to economic growth and development, and makes the economy healthy. Governments and central banks occasionally implement the stabilization policy to strengthen the economy, revive it, and stabilize it.

Economic Stability Explained

Economic stability is an essential factor that affects citizens’ lives. It is an indicator of a healthy economy, free from disruptions. Economic fluctuations can be financial, political, social, legal, or technological. Thus, a country should prepare to minimize its vulnerability to economic troubles.

Maintaining stability in an economy is very important as it creates confidence and certainty in the minds of the investors who want to invest in human capital and technological resources. Moreover, the government can identify the indicators of a stable economy and control them.

The stabilization measures, such as fiscal or monetary policies, help keep the economy on track. So, the government may adopt an easy or tight monetary policy according to financial needs.

Factors Affecting Economic Stability

Let us look at the factors impacting the economy:

Economic Stability Indicators

As economic growth and stability are closely related, a growing economy should be first stable first and then progressing second. Thus, the prime indicators of economic stability are similar to that of economic growth, and they are:

GDP – The Gross Domestic Product is a crucial macroeconomic indicator. It depicts the level of national income of a country. Higher income reflects high economic growth.Consumer Prices – These act as an indicator for shortages or surpluses of resources that influence consumers’ and institutions’ responses to the changing markets. Everyone is better off when consumer prices are stable. Employment Rate – The rate of employment or unemployment shows the degree of economic activity. It accounts for the number of people sitting idle without contributing to the economy.Rate Of Inflation – The inflation rate is perhaps a more reliable indicator of stability in an economy. Mild inflation is necessary for an economy, but a high inflation rate can put the economy at risk. In addition, high inflation hinders or stops investments from other countries as money and assets lose value.Interest Rates – Low-interest rates on borrowing will propel consumer spending and encourage money supply, which maintains stability in the economy.Level Of Debt – The national debt shows the health of an economy. Debt is necessary as it ensures government spending. However, too much debt can threaten the economy and disrupt economic stability.Public Expenditure – The effects of public expenditure on economic stability are numerous. Government should adequately spend in those areas where the focus is required to sustain financial stability.Fiscal Deficit – The fiscal deficit arises when government expenditure exceeds revenue. It can harm the economy as it will reduce economic spending. The government will borrow funds to finance the deficit. A lower deficit implies better stability.Trade Deficit – Trade deficit refers to the value of imports over exports. A healthy economy should have higher exports than imports to ensure more money flows into the country. However, inconsistencies arise when the equation is disturbed.HDI – The Human Development Index presents people’s living standards, education, health care, and overall development. Thus, literacy, life expectancy, and infant mortality rates come under HDI.

Along with these, other indicators are currency exchange rates and world stock prices. As these indicators progress, the economy achieves stability. Therefore, the government should monitor them constantly and make necessary amendments to improve the economy.

Example

Here are some economic stability examples to understand better the concept of economic stability:

Example #1

Country X is a developing economy that has always shown a sign of a stable economy. However, some disturbances due to technological innovations have impacted the economy of this country. Furthermore, the mechanization of manufacturing industries reduced the requirements for laborers.

Many people lost their jobs, and some even fell into poverty. In addition, it reduced the demand for non-essential goods, decreasing business income and downsizing the workforce. Thus, the technological wave destabilized the economy. The government introduced many stabilization policies, like the easy money policy, but the economy took a long time to recover and gravely affected many sectors.

Example #2

Economic stability in the Philippines is a case worth mentioning. The Philippines was one of the fastest-growing economies pre-COVID-19. However, due to the pandemic-induced lockdowns, the country’s GDP decreased by 9.6% in 2020. Under President Ferdinand Marcos Jr., the newly elected government introduced a series of measures to revive the economy. As a result, the country marked an 8.3% growth in the first quarter of 2022.

Example #3

In 2022, the disruption in the energy and food sector, supply-side shocks, and declining consumer sentiments can cause economic downturns in the United States.

Economists at Nomura Holdings Inc. estimate that the U.S. might face economic instability due to a mild recession in the fourth quarter of 2022 as the Federal Reserve tightens monetary policy to curb inflation. As a result, they project a decline in the economic growth of 1% in the fiscal year 2023 rather than 1.3%. At such times, the impact of the monetary and fiscal policies will be limited, but the excessive savings and consumer balance sheets will keep the effect of the mild recession.

Why Is It Important?

The benefits of a stable economy can speak for its importance:

More employment opportunities – Everyone’s participation is essential for a steady economy to work efficiently. It increases the demand for labor and, thus, increases employment. Increased public expenditure – Economic stability contributes to monetary gains, which allows the government to spend more on its citizens. It provides free education, health care, sanitation, and other public services.Improved living standards – Jobs for everyone and easy access to public goods offer a better life for the citizens. They benefit personally and socially. It also helps bring people out of poverty by giving them a fair and equal chance.Attracts FDI – A stable economy benefits everyone. Therefore, foreign investors and businesses wish to invest their funds in such an economy.Income inequality – The income inequality often goes unnoticed in a country. But a stable economy also focuses on equal distribution of income and wealth. It is essential because every citizen is a part of an economy, and collective, inclusive growth is an economy’s growth.