6.1 -The Measurement of Macroeconomic Performance

Economic growth: To improve living standards & promote economic welfare

Short run economic growth is growth of real output from using idle factors of production e.g. labour

Long run economic growth: an increase in the economy's potential level of real output, casuing an outward shift of PPF

Measured in real GDP (sum of all goods and services produced in an economy in a year, adjusted for inflation)

Nominal GDP is the sum of all good and services measured at current market prices of that year.

Real GDP is multiplied by the average current price level of the year

Full employment (or low unempoyment)

3% or less of Labour Force unemployed (Beveridge) or level of employment occuring at market clearing real wage rate (when no. of employees employers wish to hire = no.of employers wanting to work)

Measures

Claimant Count - method of measuring unemployment according to those who are claiming unemployment benefits

Labour Force Survey - Qarterly survey measuring respondent's personal circumstances and current market status over a period of 1-4 weeks. Aims to provide info on UK Labour Market.

Price Stability - To limit/control inflation or to achieve some measure of price stability

Inflation - continuing rise in the price level accross the economy

Controlling inflation is maintaining a low inflation rate, hard to achieve stable prices.

Deflation - a persisent or continuing fall the price level

Disinflation - When the rate of inflation is falling but still positive.

Measured in CPI and RPI which are types of price index (an index number showing the extent to which a price or a range of prices has changed in a period of time, measured against the price(s) in a base year)

Consumer Prices Index - official measure used to measure the rate of consumer price inflation - calculates change in prices of 700 different goods/services

Retail Prices Index - older measure used to measure the rate of consumer price inflation (used for e.g TV license but not state pensions)

Satisfactory balance of payments - avoidance of an external deficit which could lead to an exchange rate crisis.

Balance of Payments - a record of currency flows into and out of a country in a time period.

Current account of balance of payments measures in currency inflows and outflows in terms of exports (domestically produced products that are sold to other countries) and imports (goods and services produced in other country and sold onto residents of this country).

X-M = Balance of trade (difference between monetary value of a country's imports and exports). Largest part of current account

Balance of Trade Deficit - Money value of imports exceeds exports. X<M

Balance of Trade Surplus - Money value of exports exceeds imports X>M

Not possible for all countries to be in surplus so equilibrium or small surplus/deficit is best

Policy Conflict - occurs when two policy objectives cannot both be achieved at the same time. The better the performance of one objective, the worse the performance in another.

Trade off between policy objectives - May be impossible to achieve two desirable objectives at the same time,e.g. zero inflation and full employment, policy makers may be able to choose an acceptable combination between the two extremes (e.g. 2% inflation and 4% unemployment)

Examples

Full employment/economic growth or satisfactory balance of payments/exchange rate

Full employment/economic growth or controlling inflation

Economic growth or greater income equality

Change from Keynesian economics (believe governments should manage economy) FE , growth, equal distribution of income to Free Market (against government intervention). Inflation > FE + growth

Performance Indicator - Provides info regarding success or failure of an aspect of government policy, e.g. fiscal or monetary policy

Lead Indicators - Provides info about future state of economy (based on current expectations). Business confidence surveys as well as holidays booked in advance show info on future spending.

Lag Indicators - Provides info on past/possibly current state of economy. How well have onjectives been achieved?

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 are examples of indicators

Index Number - A number used in an index (such as CPI) to enable accurate comparisonsover time to be made. The base year is 100.

In subsequent years, percentage increases cause the index number to rise above the original number (e.g. a 15% increase in a year would cause a change from 100 to 115).

Vice versa can also occur (e.g. a 15% decrease in a year would cause a change of 100 to 85).

Percentage increase = Change in index points/original index number x 100