Measures of Macroeconomic Performance

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[1]The macroeconomy can be said to be performing well if it satisfies the following six criteria:

  1. Rising living standards in the long run
  2. Avoiding extremes of short run macroeconomic performance
  3. Maintaining the real value of the economy
  4. Sustainable levels of public and foreign debt
  5. Balancing current expenditure against savings for future resources needs
  6. Providing employment for all those seeking work

A brief note on each of these criteria follows.

Contents

Textbook Readings

Bernanke, Olekalns and Frank, Principles of Macroeconomics, (3rd ed, Sydney, McGraw Hill, 2011), pp. 2-6 (Chapter 1).

Rising Living Standards

Over long periods of time, it is expected that governments increase the wellbeing of their citizens, be it by providing fresh food and water, increasing land and resources, providing health care and education or any other means. Such provisions are strongly tied to the macroeconomy and therefore provide a method by which to measure its performance.

  • However, whilst rising living standards is an expectation, it is not often realised.
  • Industrialised countries such as the United States, the UK and Australia generally enjoy rising living standards whilst other countries - such as Bangladesh - have seen no growth in many years. Rising living standards can be possible but not inevitable.
  • The study of long run growth is known as growth theory and will be examined later in the course.

Avoiding Extremes of Macroeconomic Performance

Every economy runs through what is known as the short run business cycle, that is the tendency for economies to run through cycles of prosperity and poverty.

  • Prosperous times, known as expansions are typically characterised by increased production and available employment.
  • The opposite is known as contractions.

Overall, governments should reduce the extremes of both situations as excessive expansion can lead to inflation while excessive contraction is costly to the economy and may lead to situations such as the Great Depression.

Maintaning the Real Value of the Economy

Inflation is the tendency for the price of goods and services to rise over time. Deflation is the opposite effect where the price of goods and services decreases over time. The effect of these situations is that a given amount of currency will buy a different amount of goods and services.

  • Under inflation, the value of $1 will buy less goods and services than before while under deflation, $1 will buy more.
  • Under extreme situations, both inflation and deflation are costly to the economy.

It is therefore desirable to keep inflation at a lower, constant rate so that the real value of the economy does not fluctuate between extremes.

Sustainable Levels of Public and Foreign Debt

Every government needs to spend money in order to provide needs to its population (such as roads, public health etc) and it is very often the case that this expenditure exceeds the governments revenue (in the form of tax).

  • Under such circumstances governments need to borrow money either from the private sector (known as public debt) or to other governments (known as foreign debt).
  • Both of these situations change the budget deficit or surplus of the economy.

Sometimes these debts may be unsustainable and may cause the government to cut back on its expenditure or increase its taxes, both of which are costly to the economy.

Balancing Current Expenditure Against Savings for Future Resources Needs

In layman terms, this means trying to find a balance between the government (or the economy as an aggregate of individuals) spending or saving. Such decisions affect the business cycle as well as economic growth.

Providing Employment for All Those Seeking Work

This criterion is a very personal one since it affect individuals directly but it is a very complex one as it is strongly tied to the micro-economy and the macroeconomy, as well as both national and international decisions. Macroeconomics is concerned with unemployment when it is systematic and caused by identifiable decisions.

References

"Textbook" refers to Bernanke, Olekalns and Frank, Principles of Macroeconomics, (3rd ed, Sydney, McGraw Hill, 2011).

  1. Textbook, p.4
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