2.1 The measurement of
macroeconomic performance
2.1.1 The objectives of government economic policy
Macroeconomic objectives
1. Economic growth
2. Reduce unemployment
3. Low and stable inflation (target 2% +-1%)
4. Balance in trade (X=M)
Extras:
5. Reduce budget deficit (budget = gov spending - tax revenue)
6. Reducing inequality
7. Reducing environmental impact.
Potential conflicts and trade-offs
Economic growth vs inflation:
A growing economy is likely to experience inflationary pressures on the
average price level. This is especially true when there is a positive output
gap and AD increases faster than AS.
Economic growth vs the current account:
During periods of economic growth, consumers have high levels of
spending. In the UK, consumers have a high marginal propensity to import,
so there is likely to be more spending on imports. This leads to a worsening
of the current account deficit. However, export-led growth, such as that of
China and Germany, means a country can run a current account surplus and
have high levels of economic growth.
Economic growth vs the government budget deficit:
Reducing a budget deficit requires less expenditure and more tax revenue.
This would lead to a fall in AD, however, and as a result there will be less
2.1 The measurement of macroeconomic performance 1
, economic growth.
Economic growth vs the environment:
High rates of economic growth are likely to result in high levels of negative
externalities, such as pollution and the usage of non-renewable resources.
This is because of more manufacturing, which is associated with higher
levels of carbon dioxide emissions.
Unemployment vs inflation:
As economic growth increases, unemployment falls due to more jobs being
created. However, this causes wages to increase, which can lead to more
consumer spending and an increase in the average price level.
2.1.2 Macroeconomic indicators
Gross Domestic Product is the value of all goods and services produced
GDP within an economy within a given time period, usually a year. Economists
use GDP to help them measure Economic Growth.
This is GDP that takes into account the impact of inflation (i.e. a rise in
Real GDP
average price)
Real GDP per Total GDP in an economy divided by the number of people in the
Capita economy – this is used as a measure of living standards.
This is one way to measure changes in average prices in an economy.
The CPI takes a ‘basket of goods’, weights the items in the basket
Consumer Price
according to their importance in terms of how much is spent on them, and
index
then looks at changes in prices of those items to produce a weighted
average. Changes in the CPI allow us to measure inflation.
RPI is an alternative measure of inflation. Unlike CPI, RPI includes
Retail Price Index housing costs, such as payments on mortgage interest and council tax.
This is why RPI tends to have a higher value than CPI.
This measure of unemployment simply works by counting the number of
Claimant count people in receipt of unemployment benefit (Job Seekers Allowance, or
certain types of Universal Credit recipients)
This is another measure of unemployment, carried out quarterly. The LFS
Labour Force
regards someone as unemployed if they are out of work, but willing and
Survey
able to work, and actively seeking work.
This is the value of outputs compared to the value of inputs – it is a
Productivity measure of how well we use our resources. We could, for example,
measure total GDP divided by working age population.
Balance of The Balance of Payments is a measure of all an economy’s international
2.1 The measurement of macroeconomic performance 2
macroeconomic performance
2.1.1 The objectives of government economic policy
Macroeconomic objectives
1. Economic growth
2. Reduce unemployment
3. Low and stable inflation (target 2% +-1%)
4. Balance in trade (X=M)
Extras:
5. Reduce budget deficit (budget = gov spending - tax revenue)
6. Reducing inequality
7. Reducing environmental impact.
Potential conflicts and trade-offs
Economic growth vs inflation:
A growing economy is likely to experience inflationary pressures on the
average price level. This is especially true when there is a positive output
gap and AD increases faster than AS.
Economic growth vs the current account:
During periods of economic growth, consumers have high levels of
spending. In the UK, consumers have a high marginal propensity to import,
so there is likely to be more spending on imports. This leads to a worsening
of the current account deficit. However, export-led growth, such as that of
China and Germany, means a country can run a current account surplus and
have high levels of economic growth.
Economic growth vs the government budget deficit:
Reducing a budget deficit requires less expenditure and more tax revenue.
This would lead to a fall in AD, however, and as a result there will be less
2.1 The measurement of macroeconomic performance 1
, economic growth.
Economic growth vs the environment:
High rates of economic growth are likely to result in high levels of negative
externalities, such as pollution and the usage of non-renewable resources.
This is because of more manufacturing, which is associated with higher
levels of carbon dioxide emissions.
Unemployment vs inflation:
As economic growth increases, unemployment falls due to more jobs being
created. However, this causes wages to increase, which can lead to more
consumer spending and an increase in the average price level.
2.1.2 Macroeconomic indicators
Gross Domestic Product is the value of all goods and services produced
GDP within an economy within a given time period, usually a year. Economists
use GDP to help them measure Economic Growth.
This is GDP that takes into account the impact of inflation (i.e. a rise in
Real GDP
average price)
Real GDP per Total GDP in an economy divided by the number of people in the
Capita economy – this is used as a measure of living standards.
This is one way to measure changes in average prices in an economy.
The CPI takes a ‘basket of goods’, weights the items in the basket
Consumer Price
according to their importance in terms of how much is spent on them, and
index
then looks at changes in prices of those items to produce a weighted
average. Changes in the CPI allow us to measure inflation.
RPI is an alternative measure of inflation. Unlike CPI, RPI includes
Retail Price Index housing costs, such as payments on mortgage interest and council tax.
This is why RPI tends to have a higher value than CPI.
This measure of unemployment simply works by counting the number of
Claimant count people in receipt of unemployment benefit (Job Seekers Allowance, or
certain types of Universal Credit recipients)
This is another measure of unemployment, carried out quarterly. The LFS
Labour Force
regards someone as unemployed if they are out of work, but willing and
Survey
able to work, and actively seeking work.
This is the value of outputs compared to the value of inputs – it is a
Productivity measure of how well we use our resources. We could, for example,
measure total GDP divided by working age population.
Balance of The Balance of Payments is a measure of all an economy’s international
2.1 The measurement of macroeconomic performance 2
