Economic stability is a situation in which a country does not show large variations in its main macroeconomic indices. The most important are inflation, unemployment and the Gross Domestic Product (GDP).
In general, an economy is considered stable if it shows a small advance in GDP and in the level of employment. Likewise, the average rise in market prices should be minimal.
Another point to mention is that, to achieve economic stability, governments apply fiscal and monetary policies. Thus, they entrust their central bank, for example, to intervene to keep the exchange rate within a certain range.
Indicators of economic stability
The most important indicators of economic stability are the following:
- Modest economic growth: This is important because if GDP rises at very high rates, inflationary pressures can be generated. That is, if the level of economic activity accelerates a lot in a short time, prices in the economy will also tend to increase rapidly. However, salaries have not varied at the same rate.
- Low and stable inflation: When prices do not present strong fluctuations, economic agents face less uncertainty. Then, they will have more confidence to invest in the country.
- Minimum unemployment: A stable economy is approaching its natural rate of unemployment. This is possible to the extent that the level of employment increases due to the growth of GDP.
- Low fiscal deficit: It means that the treasury's income, mainly from taxes, has been only slightly exceeded by public spending. Additionally, for greater economic stability, it would be ideal to have a surplus in public accounts. That is, the non-existence of a deficit.
- Stable currency: Part of stability, it is an exchange rate without strong fluctuations. If this condition is met, exporters and importers will be able to make their projections with less uncertainty.
- Balance in the balance of payments: When in a country the income from abroad exceeds the expenses, the balance of payment is positive. As a consequence, international reserves grow. These resources, which the monetary authority administers, are important because they can be used to pay external debt or to intervene in the exchange market.
Reasons to pursue economic stability
The main reasons for pursuing economic stability are the following:
- Build confidence in capital: Investors and companies are more willing to invest in a stable economy. Thus, productive activity will increase and more jobs will be created.
- Create certainty for consumers: By keeping inflation under control, even if it is rising, people will be able to form their expectations with greater confidence. Otherwise, if they were afraid of a sudden price hike, their buying decisions would be distorted. For example, in the case of hyperinflation, the population prefers to keep its assets in non-monetary goods instead of saving in the bank.