Economic stability refers to an economy that experiences constant growth and low inflation. Advantages of having a stable economy include increased productivity, improved efficiencies, and low unemployment. Common signs of an instability are extended time in a recession or crisis, rising inflation, and volatility in currency exchange rates. An unstable economy causes a decline in consumer confidence, stunted economic growth, and reduced international investments.
The growth of international trade and commerce has allowed for the economy of one country to affect the stability of others. When a country’s economy becomes unstable, it can experience a large reduction in international investments and spending. Foreigners can also lose significant money if their investments are within a country experiencing instability. For example, if an investor in France purchased real estate within the U.S. before the economic crisis of 2008, the value of the investment may have dropped to irrecoverable lows even after the U.S.’s recovery.
Businesses cycles are commonly used to examine economic stability. A business cycle is composed of a depression, recession, recovery, and peak stage. If the economy has extreme differences between its depression and peak stages, it could be considered economically unstable. If the economy is stuck in a depression or recession for an extended period, it is also considered unstable. Countries normally experience periods of instability as they enter the depression or recession stages of the business cycle, or a financial crisis.
Policymakers usually work on reducing the impact of an unstable economy and move it onto the path of recovery. Some techniques used by policymakers include creating new job opportunities, controlling inflation, and stabilizing its currency’s exchange rate. Financing should remain flowing for business start ups and growth plans as a way of injecting money back into the economy. Inflation must be controlled because high inflation discourages international investors to purchase products or securities, since they are more expensive than before. The overall goal should be to create consumer confidence, encourage investment, and stimulate business growth.
The International Monetary Fund (IMF) was created in order to advise member countries on creating economic and financial policies to strengthen economic stability. It also provides statistics and information about the current economies of countries around the world. The IMF measures data such as gross domestic product (GDP) growth, inflation, unemployment, payment balances, exports, imports, external debt, capital flows, and commodity prices as variables to stability. It is the main source for data and statistics on the current state of most countries.