A variety of factors affect the economy.
A nation's economy can be highly volatile and is often a function of a variety of factors. In a strong economy, unemployment is low and consumers enjoy increased spending power. In a struggling economy, more people are out of work and consumer confidence dwindles. As confidence decreases, less money goes back into the economy, causing businesses to become less profitable and jobs to disappear.
Supply and Demand
Supply and demand impacts a nation's Gross Domestic Product (GDP), which is the combined dollar value of all goods ans services produced by a country in a given year. For example, according to Wealth-Enhancer.com, the high demand for personal computers in the United States in the 1990s led to an increase in the supply of computers, which contributed to an increase in GDP during that time. The higher the demand for goods and services, the greater the need for workers to produce them, leading to economic growth.
Interest Rates
Fluctuation in interest rates can have an impact on consumer purchasing. According to the Federal Reserve Bank of San Francisco, when interest rates are high, consumers may be less inclined to borrow money to buy a new home or car. People who have adjustable-rate home mortgages can face financial hardship or even lose their homes when interest rates spike. Retirees who live largely off investment income may need to lower their standard of living when interest rates decline.
Inflation
Higher inflation is typically accompanied by higher prices, so consumers may be less willing to buy non-essential or luxury items. If wages don't rise at the same rate of inflation, people actually lose money. When inflation rises, the value of the dollar decreases, so consumer buying power drops accordingly. The changing of national monetary policy, such as adjusting the prime interest rate or putting more money into circulation can influence inflation, but the Federal Reserve Bank of San Francisco reports that such changes can take one to three years to have a major impact.
Unemployment
The rate of unemployment can have a major effect on the economy. The more people who are out of work, the less money that is circulated into the economy through the purchase of goods and services. Even the threat of unemployment has an impact, as workers who fear losing their jobs are less inclined to spend or invest their money. According to Wealth-Enhancer.com, unemployment increases near the end of an economic downturn, since companies typically try to avoid laying off workers off until it becomes necessary.
Foreign Exchange Rate
A nation's foreign exchange rate is the value of its currency in the international market. In the United States, when the value of the dollar is high in relation to other countries' currencies, the more goods and services we are able to import. In contrast, a higher value of the dollar means that other nations may be less inclined to import products from the United States. According to the Economics Web Institute, factors such as a rising trade surplus can increase the demands for a country's currency by foreigners, thus strengthening the currency.
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