Select your language

Suggested languages for you:
Log In Start studying!
StudySmarter - The all-in-one study app.
4.8 • +11k Ratings
More than 3 Million Downloads
Free
|
|

All-in-one learning app

  • Flashcards
  • NotesNotes
  • ExplanationsExplanations
  • Study Planner
  • Textbook solutions
Start studying

Economic Performance

Want to get better grades?

Nope, I’m not ready yet

Get free, full access to:

  • Flashcards
  • Notes
  • Explanations
  • Study Planner
  • Textbook solutions
Economic Performance

Have you ever wondered why some countries have a better economic performance than others? What are the factors that determine a country’s economic performance? Is stable economic growth possible without inflation? All these questions on the topic of economic performance and more will be answered in this article, so keep on reading!

Definition of economic performance

What is the definition of economic performance? Well, it is something that economists define in terms of economic policy objectives. Economic performance is then defined in terms of achieving or failing to achieve these objectives.

Economic policy objectives are generally defined first so that economic performance can be evaluated against them.

Some of the primary macroeconomic policy objectives in the UK include:

  1. Stable economic growth
  2. Low unemployment
  3. Low and stable inflation
  4. Satisfactory balance of payments

Economic performance is the achievement (or failure to achieve) of economic policy objectives.

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:

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.

Rapid economic growth in Asian countries such as China and India resulted in common problems such as the widening rural-urban income gap and environmental degradation.

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.

The unemployment rate in Lesotho was 27% in 2010.1 This was coupled with high inequality and strong poverty.

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.

High and rapid inflation in Venezuela that began in 2016 forced domestic companies out of business, leading to a lack of products in shops and massive emigration.

The Bank of England sets the inflation target rate at 2% in the UK.2

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. 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.

In 2020, the United States had the world’s largest current account deficit, at $647 billion3 , whereas China had the world’s largest surplus, at $274 billion.4

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.

GDP (gross domestic product) is a monetary measure of the market value of all the final goods and services produced in an economy in a specific period. It considers factors such as consumption, investment, government spending, exports and imports. There are two sub-categories of GDP:

1. Real GDP: GDP adjusted for price changes (inflation.)

2. Nominal GDP: GDP not adjusted for price changes (inflation.)

GDP = Consumption + Investment + Government Spending + Net Exports

Net Exports is a value of total exports minus the value of total imports.

GNI (gross national income) measures the total amount of money earned by people and businesses in an economy. Compared to the GDP, it measures a nation’s wealth in a specific period.

GNI = GDP + Net Income from abroad

Employment and unemployment

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

Full employment occurs when the number of workers willing to work equals the number of workers needed.

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

The unemployment rate measures the number of unemployed people in relation to the economically active population.

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.

Balance of payments = money inflows/money outflows.

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.

Imports: goods and services produced by other countries outside the UK and sold to residents of the UK.

Exports: goods and services produced in the UK and sold to residents of other countries outside the UK.

Global economic performance: 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

Economic Performance Chart showing UKs GDP 2010 to 2020 StudySmarterFig. 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 Covid-19 Pandemic, the GDP rapidly decreased to just above £2,000,000 million in 2020.

Economic Performance Chart Showing UKs unemployment rate 2010 to 2020 StudySmarterFig. 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, Covid-19 worsened the situation and caused a rise in the unemployment rate to 4.5% in 2020.

Economic Performance Chart showing UKs inflation rate 2010 to 2020 StudySmarterFig. 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.

Economic Performance Chart showing UKs BoP Current Account 2010 to 2020 StudySmarterFig. 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.

Considering all the statistics that you just saw, think about the overall economic performance of the United Kingdom between 2010 and 2020: was it good, bad, or moderate? Why?

Economic Performance - Key takeaways

  • Economic performance describes the achievement of economic objectives.

  • The economic policy objectives are goals set by governments to improve the economic situation of their countries.

  • The main four economic objectives are growth, low unemployment, low and stable inflation, and a satisfactory balance of payments.

  • Other economic objectives are balancing the budget and economic development.

  • We can measure economic performance by using economic performance indicators such as economic growth, employment and unemployment, inflation and deflation, and the balance of payments.


References

  1. The World Bank Data, Unemployment, total (% of total labor force) (modeled ILO estimate) - Lesotho, 2010, https://data.worldbank.org/indicator/SL.UEM.TOTL.ZS?end=2021&locations=LS&start=2010
  2. Bank of England, Inflation and the 2% target, 2022, https://www.bankofengland.co.uk/monetary-policy/inflation
  3. Bureau of Economic Analysis, U.S. Current Account Deficit Widens in 2020, https://www.bea.gov/news/blog/2021-03-23/us-current-account-deficit-widens-2020
  4. UNCTAD Handbook of Statistics 2021 - Economic trends, https://unctad.org/system/files/official-document/tdstat46_FS08_en.pdf
  5. UK Office for National Statistics, https://www.ons.gov.uk/

Frequently Asked Questions about Economic Performance

Economic performance is important because it indicates if an economy is prospering or not. It measures the degree to which a government achieves its economic policy objectives.

The main economic performance indicators are economic growth, employment and unemployment, inflation and deflation, and balance of payments.

Inflation states whether the increase/decrease in average prices is not too high/low and whether a decrease/increase in the purchasing power of money is too low/high.

Final Economic Performance Quiz

Question

Define supply-side policies.

Show answer

Answer

Supply-side policies are policies that aim to increase productivity and efficiency in the economy.

Show question

Question

What is the objective of supply-side policies?

Show answer

Answer

The objective of supply-side policies is to boost aggregate supply (AS) to result in increased output.

Show question

Question

How do supply-side policies impact the LRAS curve?


Show answer

Answer

They aim to shift the LRAS curve to the right.

Show question

Question

How do supply-side policies aim to reduce inflationary pressure?

Show answer

Answer

By removing market imperfections.

Show question

Question

What are the two types of supply-side policies?


Show answer

Answer

Free market and interventionist policies.

Show question

Question

What do free market supply-side policies aim to encourage?


Show answer

Answer

Competition, market reform, and incentives.

Show question

Question

What is privatisation?


Show answer

Answer

When the government sells its previously state-owned assets to private individuals or companies.

Show question

Question

Deregulation can:


Show answer

Answer

All the answers are correct.

Show question

Question

Name an example of trade liberalisation.

Show answer

Answer

Eliminating trade barriers like tariffs.

Show question

Question

How could decreasing corporate taxes impact aggregate supply?


Show answer

Answer

Decreasing corporate taxes can allow firms to retain more of their profit and invest it back into the economy, increasing the output of the economy and shifting LRAS to the right.

Show question

Question

What are interventionist supply-side policies?


Show answer

Answer

Interventionist supply-side policies are policies that require government intervention to boost the economy.

Show question

Question

Name two examples of interventionist policies.


Show answer

Answer

Investment in human capital and investment in new technology.

Show question

Question

Which of the following is NOT an interventionist policy?


Show answer

Answer

Reducing unemployment benefits.

Show question

Question

Name two advantages of supply-side policies.

Show answer

Answer

Sustainable growth and the ability to increase employment.

Show question

Question

Name two limitations of supply-side policies.


Show answer

Answer

Time lag and costs.

Show question

Question

What is aggregate supply?

Show answer

Answer

Aggregate supply (AS) is a measure of the total volume of goods and services produced in the economy over a given time period.

Show question

Question

Name two types of aggregate supply.

Show answer

Answer

Short-run and Long-run

Show question

Question

What remains constant in the movement along the aggregate supply curve?

Show answer

Answer

Other factors

Show question

Question

What changes in the shift of the aggregate supply curve?

Show answer

Answer

Other factors

Show question

Question

Which is the vertical aggregate supply curve?

Show answer

Answer

The long-run aggregate supply curve

Show question

Question

What is the Phillips curve relationship?

Show answer

Answer

The Phillips curve relationship is an inverse statistical relationship between the rate of inflation and the rate of unemployment.

Show question

Question

How is the Phillips curve drawn?

Show answer

Answer

The Phillips curve is drawn as a downward sloping smooth curve in the unemployment-inflation plane.

Show question

Question

How are the rate of inflation and the rate of unemployment related according to the Phillips curve relationship?


Show answer

Answer

The rate of inflation and the rate of unemployment are inversely related. As the rate of unemployment decreases, the rate of inflation increases and vice versa.

Show question

Question

How many inflation theories does the Phillips curve relationship explain?


Show answer

Answer

Two inflation theories.

Show question

Question

Which inflation theories does the Phillips curve relationship explain?


Show answer

Answer

The Phillips curve relationship explains demand-pull inflation and cost-push inflation theories.

Show question

Question

What is the cause of demand-push inflation?


Show answer

Answer

Excess demand in the economy.

Show question

Question

What is the cause of cost-pull inflation?


Show answer

Answer

Rising costs of production due to trade unions bargaining for higher wages on behalf of the employees.

Show question

Question

What is the long-run Phillips curve?


Show answer

Answer

The long-run Phillips curve is a vertical line crossing the short-run Phillips curve at a point where the short-run Phillips curve crosses the horizontal axis.

Show question

Question

At which point does the long-run Phillips curve cross the short-run Phillips curve?


Show answer

Answer

A point where the inflation rate is zero and unemployment rate is called the natural rate of unemployment.

Show question

Question

What is the natural rate of unemployment?

Show answer

Answer

The natural rate of unemployment is the long-run level of unemployment below which employment can’t increase without accelerating the rate of inflation.

Show question

Question

Why is the long-run Phillips curve vertical?


Show answer

Answer

The long-run Phillips curve is vertical at the natural rate of unemployment because the trade-off relationship between the rate of unemployment and the rate of inflation disappears in the long-run.

Show question

Question

What does the Phillips curve predict?


Show answer

Answer

The Phillips curve predicts a trade-off between the rate of unemployment and the rate of inflation.

Show question

Question

Why is the Phillips curve important?


Show answer

Answer

The Phillips curve is an important tool for the government policy of reducing the rate of unemployment in the economy whilst taking into account the rate of inflation.

Show question

Question

What are adaptive expectations?


Show answer

Answer

Adaptive expectations are a type of agents’ expectation formation about the future solely based on the values observed in the current and recent past periods.

Show question

Question

What are rational expectations?


Show answer

Answer

Rational expectations  are a type of agents’ expectation formation about the future based on all the observed data (current and past), whilst acting in their full self-interest.

Show question

Question

Can unemployment be reduced in the long run?


Show answer

Answer

Unemployment can be reduced in the long run if the government implements appropriate supply-side policies to reduce the natural rate of unemployment.

Show question

Question

What will be a result of a supply-side policy targeted at reducing the natural rate of unemployment in the long-run?


Show answer

Answer

Shift in the LRPC

Show question

Question

What will be a result of a demand-side policy targeted at reducing the natural rate of unemployment in the short-run?

Show answer

Answer

Movement along the SRPC

Show question

Question

What does the trade-off region on the Phillips curve represent?

Show answer

Answer

The trade-off region on the Phillips curve represents the government's options. There are several policy choices that a government can pursue when targetting a particular level of employment and inflation.

Show question

Question

Which expectation theory underpins the short-run Phillips curve?


Show answer

Answer

Theory of adaptive expectations

Show question

Question

Who suggested the other concept of LRAS?

Show answer

Answer

Keynesians.

Show question

Question

When does macroeconomic equilibrium occur?

Show answer

Answer

Macroeconomic equilibrium occurs when aggregate demand meets aggregate supply.

Show question

Question

How can we determine the output gap?

Show answer

Answer

The output gap is the difference between the actual output and the potential or trend output.

Show question

Question

What are the types of the output gap?

Show answer

Answer

  1. Positive output gap
  2. Negative output gap

Show question

Question

What is a positive output gap?

Show answer

Answer

A positive output gap occurs when the actual output is above the potential or trend output.

Show question

Question

What is a negative output gap?


Show answer

Answer

A negative output gap occurs when the actual output is below the potential or trend output.

Show question

Question

What is Gross Domestic Product?

Show answer

Answer

Gross domestic product (GDP) is the total economic activity (total output or total income) in a country's economy.

Show question

Question

There are ____ ways of measuring GDP.

Show answer

Answer

3

Show question

Question

What are the three ways of measuring GDP?

Show answer

Answer

Expenditure, income and output.

Show question

Question

Explain the output approach of measuring GDP.

Show answer

Answer

This approach includes adding up the total value of final goods and services produced in a country's economy over a period of time.


Show question

60%

of the users don't pass the Economic Performance quiz! Will you pass the quiz?

Start Quiz

Discover the right content for your subjects

No need to cheat if you have everything you need to succeed! Packed into one app!

Study Plan

Be perfectly prepared on time with an individual plan.

Quizzes

Test your knowledge with gamified quizzes.

Flashcards

Create and find flashcards in record time.

Notes

Create beautiful notes faster than ever before.

Study Sets

Have all your study materials in one place.

Documents

Upload unlimited documents and save them online.

Study Analytics

Identify your study strength and weaknesses.

Weekly Goals

Set individual study goals and earn points reaching them.

Smart Reminders

Stop procrastinating with our study reminders.

Rewards

Earn points, unlock badges and level up while studying.

Magic Marker

Create flashcards in notes completely automatically.

Smart Formatting

Create the most beautiful study materials using our templates.

Sign up to highlight and take notes. It’s 100% free.