Key measures of economic performance

Traditionally, the key measures of economic performance in macroeconomics include:

  1. Economic growth – real GDP growth.
  2. Inflation – e.g. target CPI inflation of 2%
  3. Unemployment – target of full employment
  4. Current account – satisfactory current account, e.g. low deficit.

Other measures of economic performance can include:

  • Government borrowing/national debt
  • Real disposable incomes
  • Income inequality (Gini coefficient)
  • Labour productivity
  • Investment levels
  • Exchange rate
  • Measures of well-being – surveys which measure overall living standards. e.g. ONS well-being index.
  • Human development index (HDI) – a measure of economic development. It is a composite index which includes real GDP per capita and also factors such as education, healthcare and environmental factors.

In recent years, some economists have suggested we place greater emphasis on measures of well-being and downplay the role of economic growth.

  • Economic growth will always be a very important measure of economic activity.
  • Real wages, labour productivity and investment are closely related as they affect real GDP and vice versa.
  • I put well-being index as number 5 to show economic performance could be measured by a wider criteria than just GDP.

More detail on measures of economic performance:

Economic Growth

economic-growth-1980-95

Economic growth is usually considered to be the most important economic statistic and is frequently used for international comparisons.

If there is positive economic growth, then national income is rising, and this should enable higher living standards. Economic growth usually helps other objectives, such as unemployment, government borrowing and real disposable incomes.

This shows the slowdown in Japanese economic growth since the ‘miracle years’ of the 1950s and 1960s. Since the early 1990s, Japan’s economy has struggled to regain former rates of economic growth. This contrasts with China which has seen growth rates of over 8% a year for the past couple of decades.

Usefulness of GDP

  • For all its limitations, GDP is widely used across the world. It does give a rough guide to the level of economic activity. A fall in GDP indicates recession and rising GDP indicates growth.
  • For all its faults, GDP does give a useful guide to the economic cycle and is a useful indicator for monetary policy and fiscal policy.
  • GDP is also measurable – it is objective. Well-being measures which involve surveys become highly subjective.
  • See: Importance of economic growth.

Limitations of real GDP

  • Economic growth doesn’t necessarily increase living standards. Between 2010 and 2017, UK had positive economic growth but average real disposable incomes were stagnant. This was due to
    • Wages falling as a share of GDP.
    • Population growth which meant real GDP per capita grew at a slower rate.
  • Difficult to measure. GDP statistics are often revised. When UK economy went into recession in 2008, GDP statistics took several months to actually indicate the economy was in recession.
  • Real GDP ignores living costs. The UK has had economic growth for past couple of decades, but rising cost of living has meant many people (especially young) are finding it more difficult to live than previous generations. See: Generation rent.
  • GDP is useful as long as people are aware of its limitations.

 Inflation

inflation

Governments usually have an inflation target of 2%. If inflation rises significantly above 2%, this is a sign of economic problems. The inflation of 2000 and 2012 was due to cost-push factors (rising oil prices, rising import prices); this caused a fall in real wages. The inflation of the late 1980s and 90s, was a sign the economy was over-heating, and the government needed to increase interest rates to reduce inflation – but this caused a subsequent recession.

HIgh inflation tends to impose costs on the economy, such as increased uncertainty, less investment and it can harm long-term economic growth.

Limitations of inflation as measure

  • Low inflation is only one aspect of economic performance. An economy may have low inflation due to depressed demand and falling real GDP.
  • Cost-push inflation (e.g. due to devaluation) tends to be a one-off effect and only temporary.

Unemployment

uk-unemployment-

Unemployment is a key measure of performance. A low unemployment rate is a sign the economy is doing well and creating new jobs. Full employment is a major macroeconomic objective.

  • However, even the unemployment statistic can have limitations. For example, a fall in unemployment may hide a rise in temporary work, part-time work, under-employment and even people leaving the labour market.

Well-being index

ons-well-being

This is a measure of economic well-being and life satisfaction, created by the ONS. It looks at health, relationships, education and skills, what we do, where we live, our finances and the environment. It includes positive data but also includes surveys and questionnaires – it also uses quite a new methodology and is experimental in terms of economic data.

The interesting thing is that the well-being index notes a relative improvement between July 2011 to June 2017 – despite a period of ‘austerity’ and stagnant incomes.

Real wages

uk-real-wages-07-17

Usually, real wages are correlated with economic growth – positive economic growth usually leads to positive real wage growth. However, this shows in this period, the UK experienced periods of negative real wage growth – despite economic growth.

Other factors that can be useful

Inequality

income inequality gini

  • This shows an increase in inequality in the 1980s. Some argue this is an economic problem – people getting left behind, a greater sense of grievance and rise in relative poverty. See: inequality
  • However, rising inequality is not necessarily a bad thing – if everyone is becoming better off.

 

Median income

Suggested by the Fabian think tank. Median incomes give a better guide to average incomes of the average person. For example, if the top 1% of income earners see a large increase in incomes, this can push up average wages. But, the typical worker may not be seeing any increase in income. Median wages measure the income of the workers in the 50% income level band.

  • Air quality – Poor air quality can affect living standards.
  • Sustainability of national debt. Tax cuts financed by deficit spending may give an improvement in living standards that is short-lived. But, depends on the circumstances.
  • Levels of personal debt and savings ratio. Strong economic growth in the 2000s, masked a reliance on personal debt, which caused problems in the credit crunch of 2008.
  • Labour productivity An indicator of the long-run trend rate of economic growth.
  • Education/skills and qualifications.
  • Affordability of housing
  • Incidence of low pay/% of population on living wage

Overall

Overall, it is important for economists to look beyond the headline statistics. Real GDP will always be useful for showing the stage in the economic cycle. It is of some use in indicating living standards. But, it is far from the ultimate guide. There is always a need to look at related statistics to give a better overall picture. For example, median real wages, unemployment rates, well-being index.

Related

4 thoughts on “Key measures of economic performance

  1. . The circular-flow diagram is a simple model of the macroeconomy in which a. the flow of money into each market or sector exceeds the flow of money coming out of that market or sector. b. the value of stocks equals the value of bonds. c. households own the factors of production. d. there is only one household and one firm. e. goods and services are sold in factor markets. 2. GDP is equal to a. the total value of all goods and services produced in an economy during a given period. b. C+I+G+IM. c. the total value of intermediate goods plus final goods. d. the total income received by producers of final goods and services. e. none of the above. 3. Which of the following is included in GDP? a. changes to inventories b. intermediate goods c. used goods d. financial assets (stocks and bonds) e. foreign-produced goods 4. Which of the following is not included in GDP? a. capital goods such as machinery b. imports c. the value of domestically produced services d. government purchases of goods and services e. the construction of structures 5. Which of the following components makes up the largest percentage of GDP measured by aggregate spending? a. consumer spending b. investment spending c. government purchases of goods and services d. exports e. imports

  2. Hello , I’m fatima I prepare my PhD in logistics , in fact I hmy subject talk about “logistics and transport and their impact on economic performance my question is what is the difference between economic performance And economic growth ? And why I can’t find theories about the clear definition about economic performance in French and English . Thank you

    1. Economic growth is about rise in output, expenditure and income. Economic performance is everything about an economy- its growth, rate of price changes, unemployment, performance of current account, asset prices etc

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