Macroeconomic Performance

Macroeconomics is about the whole economy. You will be looking issues, objectives and policies that affect whole economies, for example the UK, USA or the European Union as a whole. The unemployment rate, inflation rate, rate of economic growth and balance of payments on the current account (exports minus imports) are the four most important measures of macroeconomic performance.

The Major Objectives Of Macroeconomic Policy

We have just outlined what the four most important measures of macroeconomic performance are, the four traditional major macroeconomic objectives are:

Price stability.
Low unemployment
Sustainable growth
Surplus of the balance of payments on the current account

What are the Government’s Present Economic Policy Objectives?

Each year the Chancellor of the Exchequer writes a letter to the Governor of the Bank of England outlining the Bank’s remit. Copies of the letters can be found on the Bank of England’s website:

http://www.bankofengland.co.uk/monetarypolicy/remit.htm

The present Chancellor of the Exchequer is Alistair Darling and the present Governor of the Bank of England is Eddie George. Each year the Chancellor of the Exchequer must specify what price stability (stable inflation) is taken to consist of and the Government’s economic policy objectives to the Governor of the Bank of England. The present inflation target (CPI will be covered later) for the coming year is 2.0%.

The Monetary Policy Committee decides upon the rate of interest. If inflation moves away from the target by more than 1% the Governor has to write an open letter to the Chancellor.

In addition to price stability, there are two other macroeconomic objectives of the Government, they are sustainable growth and high levels of employment.

Which Objective Was The Most Important?

AFTER THE SECOND WORLD WAR

UK Unemployment, % rates 1900-1999

Source: http://www.parliament.uk/commons/lib/research/rp99/rp99-111.pdf

Achieving low unemployment was considered to be the most important economic objective after the 2^nd World War.

The 1960s

The focus upon low unemployment moved away to attempting to reduce the deficit in the balance of payments in the current account. The chart below shows the balance of trade in goods from 1950.

This chart differs from the previous one as the current account shows the balance of trade in goods and services (the previous chart only showed trade in goods).

The 1980s

Margaret Thatcher led the Conservative Party to power in 1979. During the 1980s her government decided that price stability should be the number one economic objective. This continued to the case under subsequent Conservative (Major) and Labour (Blair and Brown) Prime Ministers.

Measuring the Performance of an Economy

Inflation and Price Stability

There are many measures that are used to calculate the increases in the price level (inflation).

Economic Growth

Gross Domestic Product (GDP) and GDP per capita are used to measure the level of economic growth within an economy. GDP per capita is the average GDP per person.

Unemployment

The Claimant Count is one method of measuring the level of unemployment in an economy, the other commonly used measure is the Labour Force Survey.

Balance of Payments on the Current Account

Index Numbers

The table below shows the Retail Sales Index for UK businesses from 1996.

Source: www.statistics.gov.uk

The base year is 2000 – index numbers are used as they are easier to understand than raw figures. We will look at index numbers in greater detail later on in the course.

Comparing Economics Using Economic Data

Source: http://www.hsbcukeconomyexplained.co.uk

The Economic Cycle

All economies grow at various rates at different points in time. Long term growth in the UK is estimated to be around 2 ½ per cent.

A recession occurs after two consecutive quarters of negative economic growth. The following chart shows economic growth in UK since 1979. You can see that there are distinct periods of growth as well as recessions.

Output Gap

An output gap will occur when the growth rate in the economy is either above or below the trend rate of growth. When a positive output gap exists the rate of growth will be above the trend rate. Conversely, the rate of growth will be below trend if there’s a negative output gap.