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Economic stability means the economy of a region or country shows no wide fluctuations in key measures of economic performance, such as gross domestic product, unemployment or inflation. Rather, stable economies demonstrate modest growth in GDP and jobs while holding inflation to a minimum. Government economic policies strive for stable economic growth and prices, while economists rely on multiple measures for gauging the amount of stability.
Features of a Stable Economy
A stable economy demonstrates steady, manageable growth in GDP and employment. Manageable growth means the economy grows at a sustained rate that does not spark inflationary pressures, result in higher prices and negatively affect corporate profits.
An economy that shows steady growth for one quarter of the year, followed by a sharp decline in GDP or a rise in unemployment in the next quarter, indicates economic instability. Economic crises, such as the global credit crunch of 2008, causes worldwide economic instability, lowering production, employment and other measures of economic health
Key Measures of Economic Stability
A modern, national economy is too complex to summarize in a single measure, but many economists rely on GDP as a summary of economic activity. Changes in the GDP over time provide a measure of stability. The GDP measures the total output of a nation’s economy in inflation-adjusted monetary terms.
Other measures of economic stability include consumer prices and the national unemployment rate. Government agencies collect monthly and quarterly data on economic activity, enabling policy makers and economists to monitor economic conditions and respond in unstable times.
Other Economic Measures
Currency exchange rates and world stock prices also provide helpful measures of economic stability, according to a fact sheet by the International Monetary Fund. Volatile swings in exchange rates and financial markets result in nervous investors, leading to less economic growth and lower standards of living.
The IMF concedes that some instability is inevitable in a dynamic economy, but reports that the challenge facing governments around the world is to minimize instability without impeding the economy’s ability to improve living standards through higher productivity and job growth.
Government Economic Policy
When sharp swings in GDP, unemployment, inflation and other measures point to unstable conditions, governments often respond with fiscal and monetary policy measures. Economists such as Harvard’s Gregory Mankiw refer to these actions as stabilization policy.
When GDP declines, for example, governments may increase their spending on goods and services to stimulate the economy while central banks may lower interest rates to ease access to credit for businesses and individuals. If the economy shows instability in the other direction, expanding at a pace likely to spark inflation, central banks may increase interest rates to reduce the nation’s money supply and bring inflationary pressures under control.