Economic Performance

Evaluating economic performance

What are some methods of evaluating economic performance? Economic performance refers to how an economy is prospering. Economists can typically assess it in terms of the achievement of economic policy objectives. The objectives are goals set by governments to improve the economic situation of their countries. Economists determine economic performance by the success or failure in achieving those goals.

A government usually has four macroeconomic policy main objectives:

• Stable economic growth
• Low unemployment
• Low and stable inflation
• Satisfactory balance of payments

Let's take a look at how economic performance can be measured by looking at these objectives in turn.

Measurement of economic performance

Accurate measurememnt of economic performance is necessary for evaluation of economic performance and macroeconomic policies implemented by governments. Let's take a look at how economic performance can be measured by looking at macroeconomic policy main objectives

Stable economic growth

Economic performance measurement is possible by evaluating how well the economic is growing. Economic growth relates to an increase in the productive potential of an economy. It is both an increase in the potential level of output that the economy can produce and an increase in the income of citizens of a country. The economic growth should be stable as rapid growth may result in issues such as inequality, inflation, current account deficit, and environmental pollution.

Low unemployment

Economic performance measurement can be seen by how low unemployment or how high the employment in the economy is. Low unemployment refers to a lower number of economically inactive people. Economists define the economically inactive population in the UK as the unemployed who have not been looking for work within the last four weeks and/or are not able to start work within the next two weeks. If the unemployment increases, the government typically failed in achieving the objective of low unemployment.

Low and stable inflation

Economic performance measurement is also accomplished by looking at how low and stable inflation is. Inflation is the increase in the average prices in an economy. If the inflation is high, this can be destabilising for the economy. Even if there is a positive rate of inflation, which is not rising in itself, the prices continue to rise every period. This means that people’s real incomes erode as they don’t necessarily increase with inflation making them unable to afford what they could afford before.

Inflation shouldn’t only be low but also stable as agents make projections about future inflation. If it goes out of control, they will not base their expectations on the stable rate set by a country’s central bank. As expectations about inflation lead to actual inflation in the economy, this can lead to an inflationary spiral where people’s incomes erode and they become poorer in real terms. This contradicts the objective of increasing the standard of living.

Satisfactory balance of payments

Finally, economic performance measurement is achieved by examining how satisfactory a country's balance of payments is. The balance of payments is a record of every transaction in an economy. It measures money flowing into and out of an economy in a specified period of time. A satisfactory balance of payments typically means that there are more inflows than outflows.

However, a large surplus may be destabilising too. In a global context, a large surplus in the Balance of Payments means a large deficit in another country. That is why economists widely agree that an equillibrated balance of payments or small and sustainable deficits/surpluses are more desirable.

Other objectives

Governments can set secondary macroeconomic objectives suitable to their needs depending on a country’s economic situation. These are some examples:

• Balancing the budget: a budget is balanced when government expenses equal government revenues. Some governments such as the UK and the USA run budget deficits because they spend more than they earn.
• Economic development: economic development refers to a standard of living in a particular country. Many African countries such as Sudan and Zambia are less developed and the living standards there are very poor.

It’s important to note that the achievement of any of the main objectives may lead to trade-offs between them. The government needs to balance attainment of the various objectives in the short and long-run. In addition, the achievement of the main objectives may contradict the achievement of the secondary objectives. Thus, a government’s emphasis on various objectives varies over time.

Economic performance indicators

Economists measure economic performance through economic performance indicators. Similarly to the objectives of a government’s macroeconomic policy, there are four main economic performance indicators:

Economic growth

Economic growth is an increase in the productive potential of an economy. It is an increase in the potential level of real output an economy can produce in a specified period (typically one year) compared to another period. Therefore, it is strictly related to GDP and GNI.

Employment and unemployment

Employment refers to economically active people whereas unemployment refers to those who are economically inactive.

The unemployment rate measures unemployment. In the UK, the two unemployment measures are the Claimant Count and the LFS (Labour Force Survey).

Inflation and deflation

Inflation is a consistent or continuing increase in average prices and a decrease in the purchasing power of money. It is the opposite of deflation: a decrease in the price levels and an increase in the purchasing power of money.

When the inflation rate is falling, but still positive, this is called disinflation. The stability of inflation can be determined by the inflation rate, which is the percentage change of the average prices in a specified period (typically one year.) The inflation measure used in the UK is the CPI (Consumer Price Index.)

Balance of payments

The balance of payments is a record of all transactions made within an economy. It measures money flowing into and out of an economy in a specified period.

Three sub-accounts make up the balance of payments:

• Current account measures the monetary value of imports and exports. It includes transactions around a country’s capital markets, industries, services, and governments.

• Capital account measures the national ownership of assets and liabilities. It includes the sources of capital and its utilisation.

• Financial account measures the monetary movements into and out of the country. A positive figure represents an inflow and a negative figure indicates an outflow.

Global economic performance example: UK

Let's take a look at an example of the global economic performance by looking at the UK.

Based on the economic performance indicators we can evaluate the economic performance of the United Kingdom.

Below you will find statistics regarding:

• Economic growth
• Employment and unemployment
• Inflation and deflation
• Balance of payments

Fig. 1 - UK’s GDP, 2010–20.Source: UK Office for National Statistics⁵

As you can see on the graph above, the GDP of the United Kingdom in 2010 equaled just above £1,800,000 million and then it increased to almost £2,300,000 million in 2019. Those nine years were a period of continuous economic growth. Unfortunately, due to the global Covid-19 Pandemic, the GDP rapidly decreased to just above £2,000,000 million in 2020.

Fig. 2 - UK’s unemployment rate, 2010–20.Source: UK Office for National Statistics⁵

As you can see in the graph above, the unemployment rate in the United Kingdom in 2010 was around 8% and then it gradually decreased to just under 4% in 2019. Over those nine years, the UK’s unemployment rate decreased by over 50%. Unfortunately, similarly to the GDP, global Covid-19 crisis worsened the situation and caused a rise in the unemployment rate to 4.5% in 2020.

Fig. 3 - UK’s inflation rate, 2010–20.Source: UK Office for National Statistics⁵

As you can see in the graph above, the highest inflation rate in the given period occurred in 2011 and equaled almost 4%. Afterward, it decreased steadily to less than 0.5% in 2015. Later on, it increased and decreased again, arriving at 1% in 2020. The inflation rate in the UK has not been particularly stable, but since 2012 it did not reach more than around 2.5%, which is relatively low compared to past years.

Fig. 4 - UK’s BoP current account, 2010–20.Source: UK Office for National Statistics⁵

As you can see above, the UK’s balance of payments on the current account in the given period was always in the red. A relatively good situation occurred in 2011 when the balance equaled a negative of £30,000 million. Similarly to the inflation rate, after 2011 the balance of payments worsened reaching around -£110,000 million in 2016. Afterward, it fluctuated and reached a little bit less than -£50,000 million in 2020. All in all, although for over half of the given period the UK’s balance of payments on the current account was lowering, after 2016 it started to recover. This can be regarded as a success in achieving a satisfactory balance of payments.