A Handful of Headline Indicators Together Show How Well an Economy Is Performing.
Definition
Real GDP: the total value of all goods and services produced in an economy over a period, adjusted for inflation so that it reflects changes in output rather than changes in prices.
- A small set of indicators is used to judge an economy's performance.
- The main ones are real GDP and real GDP per capita, the CPI and RPI, measures of unemployment, productivity, and the balance of payments on the current account.
- Each measures progress towards a different one of the government's macroeconomic objectives.
Note
- No single indicator captures the whole picture.
- A balanced judgement looks across several at once.
Each Indicator Captures a Different Dimension of Economic Performance.
- Real GDP measures the total value of output adjusted for inflation, while real GDP per capita divides this by the population to gauge average living standards.
- The Consumer Prices Index (CPI) and Retail Prices Index (RPI) measure inflation; the CPI excludes housing costs such as mortgage interest that the RPI includes, and the CPI is the Bank of England's target measure, with a 2 per cent target set by the government.
- Unemployment is measured in two ways: the Claimant Count, based on those claiming unemployment-related benefits, and the Labour Force Survey, an internationally comparable survey measure.
- Productivity measures output per worker or per hour worked, and is the key driver of long-run growth in living standards.
- The current account of the balance of payments records trade in goods and services (X minus M) along with primary and secondary income flows with the rest of the world.
- Primary income is mainly wages and investment income (interest, profit, dividends) earned across borders; secondary income is transfers with nothing given in return, such as foreign aid and remittances.
Example
- Worked example: suppose real GDP is £2,200 billion and the population is 67 million. Real GDP per capita is £2,200bn67m≈£32,800\dfrac{\pounds 2{,}200\text{bn}}{67\text{m}}\approx\pounds 32{,}80067m£2,200bn≈£32,800 per person.
- Now suppose real GDP rises 3%3\%3% to about £2,266 billion, but the population grows 1%1\%1% to 67.7 million. Real GDP per capita rises to £2,266bn67.7m≈£33,470\dfrac{\pounds 2{,}266\text{bn}}{67.7\text{m}}\approx\pounds 33{,}47067.7m£2,266bn≈£33,470, a gain of only around 2%2\%2%.
- The lesson: population growth eats into headline growth, so per capita output is the better guide to living standards.
Hint
- Nominal GDP is measured at current prices; real GDP strips out inflation.
- Always check whether a figure is real before comparing across years, or you will mistake rising prices for rising output.
Macroeconomic Data Are Estimates That Should Be Read with Care.
- Data are often revised as more information arrives, so an early GDP estimate can change months later.
- Different sources and methods can make comparison between countries and over time tricky.
- Indicators should therefore be read as informed estimates, not taken as exact.
Judge Performance by Reading Several Indicators Together.
- Read the indicators as a set: strong growth means little if it comes with high inflation or a ballooning current account deficit.
- Weigh them against the government's objectives and the current stage of the economic cycle.
Exam technique
- Judge performance across growth, inflation, jobs and the current account, not on one figure alone.
- Note where data are uncertain or subject to revision when you evaluate.
Common Mistake
- Do not judge an economy on one indicator in isolation.
- A full picture needs several indicators read together.
Self review
- Name the main indicators used to measure an economy's performance.
- How does the CPI differ from the RPI?
- What are the two main measures of unemployment?
- Why does real GDP per capita give a better guide to living standards than real GDP alone?
- Why should macroeconomic data be read with care?