Theory of economics

Currency strength and stability. A country’s currency is a reflection of the health and stability of its economy because a currency’s price is based on how buyers and sellers perceive its value. It is a lagging indicator because the currency’s value will change to reflect the political and economic circumstances of the country.

When there is significant uncertainty or change, the instability plays out across the nation’s currency and the value can change rapidly – known as market volatility.

A strong economy is viewed positively by investors, who will pay more for the currency. In turn, a strong currency boosts the economy, due to its increased purchasing power. The impact of increasing currency prices depends on whether a country is a net importer or exporter. For example, if a country is a net exporter, although goods can sold at higher foreign prices, importers might not want to pay these increased prices. Whereas if a country is a net importer, it becomes cheaper to buy foreign goods.

A weak economy discourages investment, which causes the currency to decline in value. This, in turn, lowers the price of exports, which – although less positive for domestic companies – can make prices more competitive on a global stage. It also makes imports more expensive as the currency can buy less, meaning the cost or foreign goods for companies and consumers goes up. However, there are also advantages to a weakened currency – it encourages tourism and the demand for domestic goods.

Labour market statistics. Perhaps the most useful lagging indicator is unemployment rate. If the unemployment rate increases month-on-month over a period of time, it tends to indicate that the overall economy has been declining in health. If employment rates fall, it means that businesses have finally given up hope that the situation will improve and have started to lay off their workers.

Even once the economy is considered to be back on track, unemployment rates might not decline, because employers will always wait until they are sure the economy is growing before starting to employ new workers.