Economic factors

Economic factors

(a) Economic policy, Disseminated by GOV. banks (b)economic conditions generally revealed through economic reports and other economic indicators.

1. Economic policy comprises government fiscal policy and monetary policy
2. Economic conditions include:

Government budget

The market usually reacts negatively to widening government budget deficits and positively to narrowing budget deficits. The impact is reflected in the value of a country currency.

Balance of trade levels

The trade flow between countries illustrates the demand for goods and services which in turn indicates demand for a countrys currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nations economy. Like trade deficits may have a negative impact on a nations currency.

Inflation levels

Typically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising . This is because inflation erodes purchasing power thus demand for that particular currency. However a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short term interest rates to combat rising inflation.

Economic growth

Reports such as GDP employment levels retail sales capacity utilization and others detail the levels of a countrys economic growth and health. Generally the more healthy and robust a country's economy the better its currency will perform and the more demand for it there will be.

Productivity

Increasing productivity in an economy should positively influence the value of its currency. It affects are more prominent if the increase is in the traded sector