Government macroeconomic policy objectives and indicators of national economic performance & GDP

The 6 macroeconomic government objectives
1. Low umemployment
2. Satisfactory economic growth
3. Satisfactory BoP position
4. Low and stable inflation
5. Economic stability
  1. When all macroeconomic objectives have been achieved with no tendency to change
  2. This objective is the overarching objective of the government
6. Income redistribution (reduce income inequality)
A number of key indicators must be examined in order to assess how successful a government is being in achiveing its objectives
1. The level of output
2. Economic growth
3. The inflation rate
4. The level and rate of unemployment
5. The BoP position
6. An economy can be judged to be performing well if it has high and growing output, a low and stable inflation rate, low unemployment and a healthy international trade position
The level of output and economic growth
1. One of the main indicators of a nations economic performance is its level of output which can be measured in terms of GDP
2. GROSS DOMESTIC PRODUCT (GDP): the value of everything produced within the domestic economy over a given period of time usually a year (GDP= output/population)
3. GROSS NATIONAL PRODUCT (GNP): calculated in the same way as GDP but includes the value of output produced by domestically owned factors of production which are based abroad
4. THE CIRCULAR FLOW OF INCOME: a simple model of the process by which income flows through an economy
5. There are 3 ways of arriving at a value for GDP all of which in theory should result in the same answer
  1. THE OUTPUT METHOD: involves compiling data which shows the value of output an economy produces over a given period of time. Put simply it involves adding up the value of all the goods and services produced by an economy over a given period of time. A problem however with this method is double-counting, E.g producing a car, adding up the value of the frame, tyres, brakes ect This total will always equate to the final selling price. To avoid this only the final value should be added
  2. THE INCOME METHOD: if we add up all of the factor incomes earned over a given period of time it should equate to the value of output produced by the use of the 4 factors of production (output=income) In using this measure it is important to include only income directly received in return for providing any of the 4 factors of production used used in the creation of total output. As such transfer payments are not included Eg. pensions or job seekers allowance
  3. THE EXPENDITURE METHOD: involves adding up the total expenditure on goods and services by consumers and businesses within an economy. In theory one can only spend money on goods and services that have been produced Eg. if an economy spend £1 billion in a year we must assume £1 billion worth of goods and services were produced
    1. TRANSFER PAYMENTS: transfers of income from tax payers to groups of individuals for welfare purposes
  4. Taking the 3 methods together we can see that in an economy over a given period of time: OUTPUT=EXPENDITURE=INCOME
    1. Problems with these calculations
      1. OUTPUT (double-counting)
      2. INCOME (transfer payments)
6. MEASUREMENT PROBLEMS ASSOCIATED WITH GDP CALCULATIONS: once GDP is calculated and compared over the years economic growth can be distinguished. There are however problems when economists try and arrive at a figure for GDP (regardless of methods used)
  1. EXISTENCE OF A HIDDEN ECONOMY: The output of some goods and services are deliberately not declared. The size of a hidden economy can be estimated by measuring any gaps between GDP and income methods
    1. People may seek to avoid tax payments for jobs done in spare time and not declaring it as income.
    2. Some activity is illegal and can't be declared Eg. drug dealing
    3. People may get cash in hand and therefore pay no tax Eg. babysitting
  2. NON-MARKETED GOODS AND SERVICES: output which is produced but are either not traded or are exchanged without money trading Eg. DIY, the proportion of output people produce for themselves varies from country to country Eg. in Africa they grow food to feed themselves
  3. GOVERNMENT SPENDING: goes on public goods which aren't sold Eg. wages paid to firemen are paid by government but fire services aren't sold as output. Welfare payments are also not taken into consideration
Nominal and Real GDP
1. Nominal GDP is GDP measured in terms of the policies operating in the year in which output is produced (AKA GDP at current prices) It is a measure which hasn't been adjusted for inflation
2. If nominal value rose one assumes output has increased however the price may have or a combination of both
  1. In order to overcome this confusion nominal GDP is converted to real GDP

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Government macroeconomic policy objectives and indicators of national economic performance & GDP

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