3.2.1 - The measurement of macroeconomic performance

What are the 4 main objectives of government macroeconomic policy?

1. Economic growth

2. Price stability

3. Minimising unemployment

4. Stable balance of payments on current account

TIGERS

Trade

Inflation

Growth

Stability

Employment

Redistribution

Stability

Stability

Occurs when the objectives of growth, unemployment, inflation, trade are met at the same time

What are the core macroeconomic indicators?

1. Economic growth

2. Unemployment

3. Inflation

4. Trade

5. Distribution of income

Economic growth

Represents the increase in an economy’s ability to produce goods and services

Unemployment

the no. of people who are willing and able to work but cannot find jobs

Inflation

a sustained increase in the cost of living or the general price level leading to a fall in the purchasing power of money

Trade

Compares the value of imports to exports in goods and services

Distribution of income

Assesses how incomes are shared across households in an economy

What are the government objectives for growth?

Strong, sustained, sustainable

Strong growth

High income and high living standards

Sustained growth

Continuous over time without interruption

Sustainable growth

Growth without excessive inflation or environmental damage

What are the government objectives for unemployment?

Low unemployment, full employment

What are the government objectives for inflation?

Low and stable (high inflation and deflation can damage the economy)

What is the UK’s target for inflation?

2% (+- 1%)

What are the government objectives for trade?

Balanced trade (equal value of exports and imports

Objective for distribution of income

Fair (no exact figure)

What kind of judgement is a fair distribution of income?

Normative (subjective)

What are the non-core objectives

1. Sound government finances

2. Environmental sustainability

3. Productivity growth

Sound government finances

ensures the economy can meet future obligations

Environemental sustainability

promotes sustainable practices withing economic growth

Productivity growth

focus on increasing output per worker per hour

What do macroeconomic indicators measure?

the performance of an economy

How is economic growth measured?

by the annual % change in real GDP (Gross Domestic Product)

GDP

the value of all newly produced final goods and services produced in an economy within a given time period

Real GDP

the value of GDP with the effects of inflation removed

Real GDP per capita

the value of real GDP divided by the population of the country (average rGDP per person)

What are the measures of inflation?

CPI (consumer price index) and RPI (retail price index)

CPI

A measure of the price level and inflation based on a weighted basket of goods and services (contains 700 g+s)

What are the issues with CPI?

• Unlikely to apply to one household

• Updated annually, regular updates make comparisons technically difficult

RPI

a measure of inflation:

• includes mortgage costs and council tax (unlike CPI)

• does not include those with atypical spending habits

atypical spending habits

top 4% of income earners and pensioner households

what are the measures of unemployment?

1. claimant count

2. ILO (international labour organisation) and UK LFS (labour force survey)

claimant count

no. of people who are out of work claiming unemployment related benefits such as JSA (Job Seekers Allowance)

labour force survey

must fit following criteria to be considered unemployed:

• been out of work for 4 weeks

• able and willing to start work within 2 weeks

why is it difficult to accurately measure unemployment?

• not everybody claims unemployment benefits

• some unemployed might not reveal this in a survey

Define productivity

output per worker per period of time

what does the balance of payments (BOP) measure

the flow of money in and out of a country

current account on the BOP

represents the flow of trade (X-M) in goods and services

potential conflicts/ trade-offs between the MEOs

1. economic growth vs inflation

2. economic growth vs the environment

3. economic growth and inequality

4. econ growth and a balanced budget

5. econ growth vs current account

6. unemployment vs inflation

How does economic growth affect employment and inflation?

Growth moves the economy closer to full employment, increasing demand for resources and may cause inflation above the 2% target

What environmental issues are linked to economic growth?

it can increase pollution, negative externalities, and deplete non-renewable resources more quickly

How can economic growth impact income inequality?

often benefits owners more than workers, as profits rise faster than wages, increasing inequality

explain the conflict between economic growth and balanced budget

growth driven by expansionary fiscal policy often requires a budget deficit (which requires less expenditure + more tax revenue → leads to a fall in AD → less economic growth)

How does economic growth influence the current account balance?

Higher incomes from growth increase imports, which can worsen the current account.

What happens to inflation when unemployment is low?

Fewer available workers push up wages, contributing to overall inflation.