How weather influences the economy? A nd how can we reduce its impact? study the link between weather and stock compares during 50 years the Dow Jones Industrial Average index and the daily cloudiness. The result is; there is a positive relationship. But how is that possible? Investors should not be impartial? I did not expected that when I give money to my bank, an investor could be influenced by a sunbeam. A possible explanation is that is the entry of sunshine periods who can be more optimistically when they are in a good mood which can results of the weather.
So they can change stock prices, and affect all the market. Among other things, to reduce influence of routine weather variations on the economy, French Government set up controlled sales. French sales, are very controlled , it is during specific dates, and concerns only unsold clothes during a period. This reduces the influence of climatic on an example. In 2010, during all july. If spring and beginning of summer were cooler than expected, it would reduce shopping. So by decreasing prices, it could bring back customers in malls and increase consumption.
This is an incentive policy to reduce influence of routine weather. An other way to reduce influence of routine weather, is to apply the idioms : «do not put all your eggs in one basket». For example, if I am the owner of a beer bar, my yield depends on sunshine. So if i want to redu hot chocolate. By this way, you reduce the weather influences, and sales during the all year are constant. However, we can not always diversify its business, for example in a theme park during a raining week, it is very difficult to attract clients, they will prefer to wait for next week.
So it could be a good idea for them to get an insurance, or as we introduced this article they could buy a weather derivatives (or futures). Weather derivatives are financial instruments that can be used to reduce risk In 1999, the CME (Chicago Mercantile Exchange) introduced the first exchange-traded weather futures contracts on the market. Indeed, the benefit of futures contracts is to protect its market against the involved variable exemple futures. So why CME introduced financial instruments that can be used to reduce risk associated with weather?
Because Weather influences us, indeed psychology literature has long established the effect of weather on mood. It is a known fact the economy in a country whereas routine lightly, to consumption. While comparing the consumption of beers during a year, we notice that it increases from winter to summer period by 25%. On the contrary, purchasing movie tickets decrease by about 20%. It is a perfect example to see how weather influence the demand of two goods. As we study the impact of routine weather, we know that weather does not change anything in hop agricultur and movies.
So it only influences the demand. Hops farmers and movie directors had better pray to get an ideal weather if they want to succeed in their business. Indeed, the study, led by the NCAR (National Center for Atmospheric Research) pointed out that every sector of the economy is sensitive to changes in the routine weather(2). It has a bigger impact than everyone thought, the economic cost of weather amounts to 485$ billion in USA each year which is 3. 4% of united states GDP (gross domestic product). As Jeffrey Lazo, an economist says that : «It is clear that our economy is not weatherproof».