The economy
What drives the world economy? The simplest answer to this question is 'consumer spending’.
And what drives ´consumer spending´? Some combination of the following factors is generally
considered to provide: a reasonable answer.
1.- GDP growth for different countries
Gross domestic product (GDP) measures the
size of a country's economy. It represents the
total value of all goods and services produced
over a specific time period. Growth in GDP is
one of the primary indicators used to gauge (=
measure) the health of a country´s economy .
Usually, GDP is expressed as a comparison to
the previous quarter or year.
2.- Government trade policy
The two roles of government policy are
¨liberalization¨ and ¨protectionism¨.
• ¨Liberalization¨ is associated with
free markets, open borders,
deregulation and the free movement
of capital around the world.
• ¨Protectionism¨ is associated with
government intervention, subsidies,
quotas and tariffs, and restrictions on
the movement of capital.
National governments have some genuine
choices her even if theay are constrained by
the policy of their regional trading bloc (eg.
The EU, NAFTA, ASEAN). In the end most
countries have a mixed economy which is
somewhere between the two extremes.
Generally speaking, free markets promote
growth in the world economy, and protected
markets slow down the process ( although
they may have a beneficial effect on particular
industries inside a country).
3.- Consumer confidence
If consumers are confident about tomorrow,
they will spend more. The main factors
affecting consumer confidence are: the level
of unemployment- if people´s job are at risk,
or they don´t have a job, they will spend less-
and house prices- if people´s houses are
worth more than they paid for them, they feel
rich and will spend more freely
4.- Interest rates
Interest rates are set by Central Banks. When
interest rates are low, consumers and
businesses can borrow money cheaply and
there is a stimulus to the economy. But the
cheap credit also causes inflation and too
much liquidity in the system. This liquidity
leads to bubbled in stock markets, housing
markets, etc. When the Central Bank sees the
need to control inflation and cool growth a
little, it raises interest rates.
5.- Exchange rates
Currency fluctuate against each other: the
euro against the dollar, the yen against the
yuan. This is due to many complex factors
such as the underlying strength of the
economy, interest rate differentials and
speculation.
Having a strong currency makes imports
cheap for domestic consumers, but hurts
exporters (whose products becomes more
expensive overseas.
6.- The business cycle
Economics go through cycles of growth and
contraction ( = slowdown)