1 – The Measurement of Macroeconomic Performance

The Objectives of Government Economic Policy

The main objectives of government macroeconomic policy: economic growth, price stability, minimising unemployment and a stable balance of payments on current account.

Macroeconomic Objective: goal gov wants to achieve

Economic Growth

• Measures how much value of output produced in economy ↑ over period of time
• Short-Run Economic Growth: ↑ of real output ∵ using idle resources (incl. labour) ∴ taking up slack in economy
• Long-Run Economic Growth: ↑ in economy’s potential level of real output & outward shift of economy’s PPF
• Real GDP: measure of all goods & services produced in economy in year, adjusted for inflation
• Nominal GDP: GDP measured at current market prices, without removing effects of inflation

Price Stability (Inflation)

• How fast avg. level of prices of goods & services ↑ over year
• Inflation: continuing ↑ in average price level
• Deflation: continuing ↓ in average price level
• Disinflation: rate of inflation ↓ but still positive

Minimising Unemployment

Minimising no. of those of working age who’re looking for work but unable to find job

Stable Balance of Payments on Current Account

Balance of Payments: record of all currency flows in & out of country in time period; exports (+), imports (–)

Balancing the Budget

• Gov wants gov expenditure = taxation so gov’s budget’s balanced
• Balanced Budget: gov spending = gov revenue
• Budget Deficit: gov spending > gov revenue

Achieving Equitable Distribution of Income

Gov wants to ensure gap between richest & poorest doesn’t become excessively wide

The possibility of conflict arising, at least in the short run, when attempting to achieve these objectives.

• Policy Conflict: when 2 policy objectives can’t both be achieved at same time
• Trade-off between Policy Objectives: though impossible to achieve 2 desirable objectives at same time, e.g. zero inflation & full employment, policy-makers choose acceptable combination between extremes, e.g. 2% inflation & 4% unemployment

Importance of Economic Objectives

• Economic growth, price stability & minimising unemployment main priorities among gov’s economic objectives
• Gov has priorities which’re considered more imp. to achieve; priorities Δ as circumstances Δ

Macroeconomic Indicators

Data which is commonly used to measure the performance of an economy, such as: real GDP, real GDP per capita, Consumer Prices and Retail Prices Indices (CPI/RPI), measures of unemployment, productivity and the balance of payments on current account.

Performance Indicator: provides info for judging success/failure of particular type of gov policy

• Lead Indicators: provide info about future state of economy
• Lag Indicators: provide info about past & current economic performance & extent to which policy objectives achieved

Real GDP

• Measure of national income of economy; based on value of all incomes earned in economy over period of time
• Real GDP measures value of GDP after removing effect of price Δ from its value → ensures ↑ in GDP from 1 year to next represents ↑ output of goods & services rather than just ↑ in prices
• Though no actual target for growth in real GDP, gov likes to achieve positive rate (growth of between 2% – 3% yearly)

Real GDP per capita

• Used to make comparisons between countries in terms of standard of living
• To make comparisons ↑ accurate, avg. income per person used

Consumer Price Index (CPI) & Retail Price Index (RPI)

• Gov has target rate of inflation of 2%
• UK: 2 main measures used to record rate of inflation – CPI & RPI
• Both incl. prices of goods/services typically bought by households
• Though CPI measure is ‘official’ measure used to calculate inflation, RPI still used by gov
• Job of Bank of England: achieve inflation target

Measures of Unemployment

• Many people not working, but people only count as part of unemployment statistics if part of labour force (i.e. those in work / actively seeking work). UK: 2 main measures of unemployment:
• Claimant Count: measures unemployment according to those claiming unemployment-related benefits (Jobseeker's Allowance)
• Labour Force Survey: quarterly sample survey of households to provide info respondents’ personal circumstances & labour market status during period of 1-4 weeks
• Measure higher than claimant count ∵ incl. those receiving benefits & those who don’t qualify for benefits

Productivity

• Measures how much output produced by each unit of labour
• Labour productivity measures output of workers
• Capital productivity measures efficiency of machinery
• Long run economic growth comes from improvements in productivity, which come from making workers more efficient in producing output & improving efficiency of capital

Balance of Payments on Current Account

• Current Account of the Balance of Payments: measures all currency flows in & out of country in time period in payment for exports & imports, together with income & transfer flows
• Balance of Trade: difference between value of country’s imports & exports; largest component of balance of payments on current account
• Balance of Trade Deficit: imports exceed exports
• Balance of Trade Surplus: exports exceed imports

The Uses of Index Numbers

How index numbers are calculated and interpreted, including the base year and the use of weights.

Index Number: no. used in index, e.g. CPI, for accurate comparisons over time

• Base year index no.: 100
• In following years, % ↑ → index no. ↑ above index no. recorded for previous year
• % ↓ → index no. ↓ below index no. recorded for previous year
• E.g. index no. of 105 means 5% rise from base year; index no. of 95 means 5% fall

Price Index: index no. showing extent to which price/‘basket’ of prices has changed over month, quarter or year, in comparison with price(s) in base year

Consumer Prices Index (CPI): official measure used to calculate rate of consumer price inflation. Calculates avg. price increase of basket of 700 diff. consumer goods & services

Retail Prices Index (RPI): older measure used to calculate rate of consumer price inflation. UK gov uses CPI for indexation of state pensions & welfare benefits & for setting monetary policy target, & RPI for uprating each year cost of TV & motor vehicle licences, together sometimes with taxes on goods like alcoholic drinks

Indexation: automatic adjustment of items like pensions & welfare benefits to Δ in price level through use of price index

How index numbers are used to measure changes in the price level and changes in other economic variables.

• Inflation rate measured through annual % Δ in CPI
• CPI calculated by combining price data for UK as whole for products bought by imaginary ‘typical’ family → CPI represents spending patterns of typical UK household
• Range of goods & services incl. in calculation referred to as basket of goods & services – ‘basket’ includes over 700 items & prices of these checked in thousands of shops in UK each month
• Basket of goods & services updated annually ∵ new products emerge & old ones decline in popularity, e.g. in 2015, E-cigarettes added to ‘basket’
• CPI is weighted price index. ‘Weights’ attached to items in CPI according to importance to avg. family in their spending patterns. E.g. doubling of price of light bulbs has less impact on CPI number than doubling of price of cars ∵ light bulbs less significant items in average spending plans

Issues with CPI

• ∵ based on ‘imaginary’ typical family, doesn’t reflect anyone’s exact spending patterns – representativeness depends on how close person’s spending patterns are to those on which CPI based
• Inflation ‘basket’ incl. many goods & services that not everyone buys; e.g. most people don’t smoke but cigarettes still incl. within basket to account for those who do
• Regular updates to basket means we’re not always comparing like with like (i.e. 2016 basket will differ from 2015 basket), though updated items small in number
• No account taken of quality of items incl. E.g. computer may cost more in 2016 than in 2009 but it will be better in terms of capability – does this mean it really has become more ‘expensive’?
• Note: House prices & mortgages not in CPI basket ∴ rapid house price increases/cuts in mortgage repayments won’t show in CPI