Economic stability is a desirable goal for any country, as it implies low inflation, steady growth, and minimal unemployment. But how can we measure how stable an economy is, and what factors affect it? In this article, we will explore some of the indicators and tools that economists use to assess economic stability and its implications for policy and welfare.
One of the most common measures of economic stability is the inflation rate, which reflects the change in the average price level of goods and services over time. A low and stable inflation rate indicates that the economy is not experiencing excessive demand or supply shocks, and that the purchasing power of money is relatively constant. However, a high and volatile inflation rate suggests that the economy is facing uncertainty, distortions, and inefficiencies, and that the value of money is eroding rapidly. Therefore, most central banks aim to keep inflation within a certain target range, usually around 2% per year.
Achieving economic stability is like trying to balance many levers at the same time. On measuring it, many aspects have to be combined. On one hand, you need to achieve economic growth that is sustainable over long period of time. This growth has to reflect into jobs and hence lower unemployment rate. This growth has also to be balanced so as not to ignite inflation and get it out of control. The fruits of this growth has to be distributed so that you have income inequality in check and poverty rate decreasing over time. And for emerging economies, you need to have a stable balance of payment and war chest of foreign reserves to avoid run on your currency that can ruin all your efforts as a country to achieve sustainable economic growth.
good definition to the economic growth I think this should be in line with better transparency level that gives indication on decreasing corruption costs
Measuring economic stability, especially in an economy heavily dependent on the oil sector involves assessing a range of economic indicators and factors that provide insights into the overall health and resilience of the economy. Here are some key measures and considerations: - Oil Price Volatility - Government Revenue Diversification - Fiscal Deficits and Government Debt - Foreign Exchange Reserves - Economic Growth - Inflation Rate - Current Account Balance - Sovereign Wealth Funds - Policy Responses - Political and Geopolitical Stability - Social and Economic Indicators
There are two main types of inflation: 1-demand-pull inflation 2-cost push inflation Demand-pull inflation occurs when aggregate demand the total amount of goods and services that are demanded exceeds aggregate supply the total amount of goods and services that are supplied, this can happen when the economy is growing too quickly or when the government introduces too much stimulus into the economy. Cost-push inflation occurs when the cost of producing goods and services increases. This can happen due to factors such as rising wages, higher energy prices, or supply chain disruptions.
Economics is a function of human behavior which is not stable by nature. Economist always forget this fact. That’s why long run economic stability is more of a dream . Let’s not forget about the very ancient school of economics in Egypt . We always have seven years up and seven years down . This is how the world goes on and on .
Another important measure of economic stability is the GDP growth rate, which reflects the change in the total output of goods and services produced in an economy over time. A positive and steady GDP growth rate indicates that the economy is expanding, creating more income, employment, and opportunities for people. However, a negative or erratic GDP growth rate suggests that the economy is contracting, losing income, jobs, and prospects for people. Therefore, most governments try to stimulate or support GDP growth through fiscal and monetary policies, especially during recessions or crises.
It's important to recognize that GDP growth, by itself, doesn't encompass all dimensions of economic welfare. Factors such as disparities in income, accessibility to education and healthcare, and the sustainability of the environment are also vital elements to gauge the holistic state of an economy and the quality of life of its residents. Consequently, government officials and policymakers frequently rely on a blend of economic metrics to guide their informed choices regarding economic policies and interventions.
A third key measure of economic stability is the unemployment rate, which reflects the proportion of the labor force that is actively looking for work but cannot find a job. A low and stable unemployment rate indicates that the economy is utilizing its human resources efficiently, and that most people who want to work can find suitable employment. However, a high and persistent unemployment rate suggests that the economy is wasting its human potential, and that many people are facing hardship, poverty, and social exclusion. Therefore, most policymakers aim to reduce unemployment through various interventions, such as education, training, subsidies, or regulations.
One vital gauge of economic stability is the unemployment rate, which represents the proportion of the labor force actively searching for work yet unable to secure positions. A stable, low unemployment rate indicates efficient workforce utilization, ensuring that the majority of job seekers can locate suitable employment. Conversely, a prolonged high unemployment rate suggests a potential underutilization of human resources, resulting in adversity, impoverishment, and social isolation for many. As a result, policymakers frequently prioritize decreasing unemployment through diverse strategies, encompassing investments in education, training, subsidies, and regulatory actions.
I think unemployment is viewed from the wrong perspective, especially in emerging markets. For instance, in Nigeria unemployment was previously calculated - not based on the International Labor Organization's (ILO) method. Thus, Nigeria’s statistics office mostly produced large unemployment rates. However, once the ILO’s method was adopted, the local unemployment rate drastically adjusted downward. Nigeria’s informal sector is probably 70% of its total economy, and based on the prior calculation method, many local informal sector agents were previously considered to be unemployed. These economic agents collectively generate significant monies, daily, some of which the government cannot even account for. Poor welfare is the real issue here.
A fourth crucial measure of economic stability is the balance of payments, which reflects the difference between the total value of transactions between a country and the rest of the world. A balanced or surplus balance of payments indicates that the country is earning more than it is spending in its international trade and financial transactions, and that it has a strong and competitive position in the global economy. However, a deficit or unstable balance of payments suggests that the country is spending more than it is earning in its international trade and financial transactions, and that it has a weak and vulnerable position in the global economy. Therefore, most countries try to maintain or improve their balance of payments through various measures, such as exchange rate policies, trade agreements, or foreign reserves.
The fourth crucial metric for economic stability is the balance of payments, which highlights the disparity between a nation's overall transactions with the rest of the world. When a country maintains a balanced or surplus balance of payments, it indicates that it's earning more than it's expending in global trade and financial interactions, demonstrating a strong and competitive global position. Conversely, when there's a deficit or an unstable balance of payments, it suggests that the country is outspending its earnings in international trade and finance, revealing a vulnerable and precarious standing in the global economy. Consequently.
Behavioral economics can be tied to international trade. In my opinion, an equilibrium or surplus balance of payment partly depends on a nation’s citizens’ preference for local products. China is a prime example of this, the more the Chinese have been encouraged to believe in China’s domestic products, the richer the country has gotten overtime. Citizens buying their own locally made products strengthens their local currency, as there is a fast circular flow of income, thereby expanding the economy. This, in my mind, is even one of the reasons why the U.S. got to the top earlier in its history.
A fifth and more comprehensive measure of economic stability is the economic freedom index, which reflects the degree to which a country's institutions and policies promote individual liberty, market efficiency, and rule of law. A high and consistent economic freedom index indicates that the country has a sound and stable economic system, and that its people enjoy a high level of prosperity, security, and opportunity. However, a low or variable economic freedom index suggests that the country has a flawed and unstable economic system, and that its people suffer from a low level of well-being, safety, and choice. Therefore, most countries try to enhance their economic freedom through various reforms, such as reducing corruption, improving governance, or protecting property rights.
The economic freedom index serves as a more comprehensive fifth measure of economic stability. It evaluates how a nation's institutions and policies support individual freedoms, market efficiency, and adherence to the rule of law. A consistently high economic freedom index indicates the presence of a strong and reliable economic system, resulting in increased prosperity, security, and opportunities for its citizens. Conversely, a low or inconsistent economic freedom index suggests that the nation's economic system is flawed and unstable, leading to reduced well-being, security, and freedom of choice among its populace. As a result.
A sixth and more holistic measure of economic stability is the economic stability index, which combines several indicators of macroeconomic performance, volatility, and resilience into a single score. A high and stable economic stability index indicates that the country has a robust and resilient economy, and that it can withstand and recover from various shocks and crises. However, a low or fluctuating economic stability index suggests that the country has a fragile and vulnerable economy, and that it is prone to and affected by various shocks and crises. Therefore, most countries try to improve their economic stability through various strategies, such as diversifying their sources of income, strengthening their institutions, or building their buffers.
Keep an eye out for the following: HDI - Human Development Index (life expectancy, education, income) Gini coefficient - not index per se, but good indicator of inequality GCI - Global Competitiveness Index (12 "pillars", for example: infrastructure, macroeconomic stability, health, education, and innovation)