Economic instability is the frequent change in a country’s income, employment, or financial well-being that is unpredictable and unintentional. It is a stage that the country’s economy is going through an unhealthy expansion or a recession associated with an increase in the price level of goods and services. It captures a pattern of multiple changes that lead to economic instability created by various issues. It is created by factors like fluctuation in the stock market, black swan events, interest rate changes, and a fall in home prices.
A stock market is where the buying and selling of stocks take place and provides a source of savings for the members. Prices of stocks in the market can rise or fall, causing volatility. When prices decrease, the companies incur losses, making them lay off workers, meaning there will be less income to dispose of in the economy. The value of stocks dropping can affect consumers’ confidence and cause a loss of consumer wealth, making them sell their stocks or buy fewer shares leading to a recession.
Black swan events are unexpected actions that significantly destabilize the economy. They include pandemics like COVID-19 and natural calamities such as hurricanes. They cause short-term fiscal problems and long-term economic impacts. They can lead to increased expenditure and decreased tax revenues to middle-income countries when trying to curb the disease. These events can cause economic shocks due to scarce labor, leading to closed borders and lessening business activities. They also cause quarantines and travel restrictions, leading to a fall in economic growth.
Interest rates control inflation, such that when the rates drop, a lot of money is injected into the economy causing prices of goods and services to rise. To counter this, a country can increase the interest rate, which would attract recession. This is because borrowing becomes expensive with high-interest rates, leading to less consumption and investment. It makes people spend their own saved money, reducing consumer spending and decreasing growth in aggregate demand. It reduces savings, limiting the supply of money in circulation and increasing the currency’s value disadvantaging the citizens. Interest rates also have a delayed effect in that their impact can continue affecting consumers for longer periods.
Today’s real estate markets are essential in a country’s economy. When prices of homes decrease, this will cause a shocking wave to the economy. This is because, for householders’, the value of their houses has reduced to the point that they owe more on loans than their property. This can lead to financial losses for the banks, negative equity, and a rise in defaults. Customers will have lower confidence in spending, and banks will lose money due to failed mortgage payments leading to a fall in bank lending.
In conclusion, economic instability is the frequent change in the economy caused by factors like fluctuations in the stock market, black swan events, and interest rate changes. The increase and decrease in stock value make people buy more or stop purchasing more stock. Black swan events cause economic instability because of loss of labor due to death and illnesses. The increase and decrease of interest rates also cause less consumption and investment because people have to use their saved money. When real estate prices go down, houses’ value decrease and banks lose money due to failed mortgage payments.