Factors Affecting Economics

The economy is a central domestic policy for all governments, regardless of political views. Ensuring the economy is growing, keeping unemployment down and inflation at a manageable level can easily make the difference between political rejection and re-election. There are numerous factors that affect economics and are closely monitored by governments, banks and businesses to guide them.

Inflation
Inflation is the average amount by which products go up in price. It is measured by the retail price index (RPI) and the consumer price index (CPI). Both consider the average basket of goods, which includes food, clothing and utility bills, but the RPI also factors in mortgage repayments. A certain level of inflation is to be expected and is, in fact, desirable, but long-term, high inflation is a major economic worry as wages will not rise at the same level, meaning average income in real terms goes down.

Growth
Economic growth is the most closely followed economic measurement as it is a clear indication of how well an economy is performing overall. This is measured by the gross domestic product (GDP) and is a calculation of how much money there is in the economy overall. Prolonged negative growth leads to recession, unemployment and other problems; however, it is also important that economic growth rises gradually. This is because, if an economy expands too fast, the country's infrastructure will not be able to cope.

Unemployment
Keeping people employed is vital for governments for several reasons. The unemployed can claim benefits that cost the government money and also have less cash to put into the economy. Rising unemployment also leads to a fall in consumer confidence as people start to worry about job security. This can lead to an unexpected increase in saving which can lead to rising inflation as businesses try to compensate for loss of earnings.

Business Confidence
Governments do not create jobs; businesses do. The most important job for any government in this area is to create the most attractive conditions possible for businesses to invest. This will reduce the unemployment rate, pump money into the economy and increase tax revenue through income and corporate taxes.

Consumer Confidence
Making sure people are willing to spend money is also very important as this is the life line for the majority of businesses. Consumer confidence is an issue that is unquantifiable and, as such, unpredictable. It can be affected by job security, faith in the government and even the weather. There is no tool that can be used to improve consumer confidence on its own, but it must be monitored closely to try and predict future trends.

Interest Rates
Interest rates are the only tool available to try and move an economy. This is set by a central bank in most developed countries and is the rate by which money is paid back on a loan or gained through savings. To encourage people and businesses to spend, interest rates are kept down in an attempt to grow the economy. High interest rates are designed to encourage people to spend to stop the economy from getting out of hand.