Lesson 7 : Economic Factors

* Economic policyowner comprises government fiscal policyowner (budget/spending practices) and monetary policyowner (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).

* Government budget deficits or surpluses: 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's money.

* Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's money to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's money.

* Inflation levels and trends: Typically a money 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 money. However, a money 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 and health: Reports such as GDP, employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its money will perform, and the more demand for it there will be.

* Productivity of an economy: Increasing productivity in an economy should positively influence the value of its money. Its effects are more prominent if the increase is in the traded sector [3].


These include: (a)economic policyowner, disseminated by government agencies and central banks, (b)economic conditions, generally revealed through economic reports, and other economic indicators.