Measurement of macroeconomic performance

Question 1

What are the four government macroeconomic objectives?

Answer 1

1. Economic growth.
2. Low unemployment.
3. Price stability.
4. Balance in the balance of payments.

Bonus: Government might aim for fair distribution of income and wealth, and a balanced government budget.

Question 2

What are the target rates for unemployment and inflation?
Why is this the target rate of unemployment?

Answer 2

Unemployment - around 3%, as this takes frictional unemployment into account.
Inflation - 2% +/- 1%.

Question 3

What are some potential conflicts/trade-offs?

Answer 3

Economic growth vs inflation.
Economic growth vs balance of payments on the current account.
Economic growth vs government budget deficit.
Unemployment vs inflation.

Question 4

What is real GDP?
What is it used to measure?

Answer 4

The total value of output of all goods and services produced in a country over a period of time, adjusted for inflation.
Used to measure economic growth.

Question 5

What is the CPI?
What is it used to measure?

Answer 5

The CPI, or consumer price index, is the changes in price of an ‘average basket of goods’.
Used to measure inflation.

Question 6

What is the balance of payments?
What does it consist of?

Answer 6

The record of all financial transactions from one country to other countries.
It consists of the current account, the financial account, and the capital account.

Question 7

What are the measures of unemployment?

Answer 7

The claimant count and the Labour Force Survey (LFS), which is taken by the International Labour Organisation (ILO).

Question 8

What is the multiplier effect?

Answer 8

Injections into the circular flow of income may lead to multiple increases in real GDP.