Macroeconomic stability

Macro stability can be measured by the volatility of key indicators:

1. Consumer price inflation (annual % change in prices)
2. Real GDP growth over one or more business cycles
3. Changes in measured unemployment / employment
4. Fluctuations in the current account of the balance of payments
5. Changes in government finances (i.e. the size of the fiscal deficit or surplus)
6. Volatility of short term policy interest rates and long term interest rates such as the yield on government bonds
7. Stability of the exchange rate in currency markets

A stable economy provides a framework for an improved supply-side performance i.e.

• Stable low inflation encourages higher investment which is a determinant of improved productivity and non-price competitiveness
• Control of inflation helps to main price competitiveness for exporters and domestic businesses facing competition from imports
• Stability breeds higher levels of consumer and business confidence – sentiment drives spending in the circular flow
• The maintenance of steady growth and price stability helps to keep short term and long term interest rates low, important in reducing the debt-servicing costs of people with mortgages and businesses with loans to repay
• A stable real economy helps to anchor stable expectations and this can act as an incentive for an economy to attract inflows of foreign direct investment

UK exambuster