The Measurement of Macroeconomic Performance

What the spec says we need to know about:

• Macroeconomic Indicators
• The Economic Cycle

Macroeconomic indicators

There are four main macroeconomic indicators. These four macroeconomic indicators can be used to measure a country's economic performance:

• The rate of economic growth
• The rate of inflation
• The level of unemployment
• The state of the balance of payments

Governments use these indicators to monitor how the economy is doing.

GDP is a measure of economic growth

Economic growth can be measured by the change in national output over a period of time. The national output is all the goods and services produced by a country.

Output can be measured in two ways:

• Volume
  • Adding up the quantity of goods and services produced in one year
• Value
  • Calculating the value (£ billions) of all the goods and services produced in one year

National output is usually measured by value- this is called the Gross Domestic Product (GDP)

GDP can also be calculated by adding up the total amount of national expenditure (aggregate demand) in a year or by adding up the total amount of national income earned in a year. This means that, in theory, national output = national expenditure = national income.

Economic growth is usually measured as a percentage

The rate of economic growth is the speed at which the national output grows over a period of time.

To measure the rate of economic growth over time as a percentage, use the formula:

Change in GDP (£ billions) / Original GDP (£ billions) * 100 = Percentage chnage

Some GDP growth may be due to prices rising. Nominal GDP is the name given to a GDP figure that hasn't been adjusted for inflation. This figure is misleading, as it will give the impression that GDP is higher than it is.

Economists remove the effect of inflation to find what's called real GDP. E.g. a 4% increase in nominal GDP during a period when inflation was 3% means that real GDP only rose by about 1%. The other 3% was due to rising prices.

GDP per capita can indicate the standard of living in a country

GDP can be used to give an indication of a country's standard of living. This is done by dividing the total national output by the country's population to get the national output per person- GDP per capita. 

In theory, the higher the GDP per capita, the higher the standard of living in a country.

Economists also use Gross National Income (GNI) per capita to compare living standards between different countries. The GNI is the GDP plus net income from abroad- this net income is any income earned by a country on investments and other assets owned abroad, minus any income earned by foreigners on domestically.

Using GDP to make comparisons has limitations

GDP and GDP per capita are used to compare the economic performance and the standards of living in different countries:

• A high GDP would suggest a country's economic performance is strong
• A high GDP per…