Economic Performance

Have you ever wondered why some countries globally 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!

Economic Performance Economic Performance

Create learning materials about Economic Performance with our free learning app!

  • Instand access to millions of learning materials
  • Flashcards, notes, mock-exams and more
  • Everything you need to ace your exams
Create a free account
Table of contents

    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 post 2008 global Financial Crisis.

    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. 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.

    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 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 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 global 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, global Covid-19 crisis 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.

    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

    Why is economic performance important?

    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.

    What are economic performance indicators?

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

    How is inflation used to measure economic performance?

    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.

    How to measure economic performance of a country?

    Economic performance of a country is measured through economic performance indicators such as GDP  (gross domestic product) or GNI (gross national income).

    What is the relationship between living standards and economic performance?

    There is a positive relationship between living standards and economic performance as the living standards generally improve with higher economic performance.

    Test your knowledge with multiple choice flashcards

    There are ____ ways of measuring GDP.

    Lead indicators look at the ______ state of the economy.

    Which of the following is not considered in calculating HDI?

    Next

    Discover learning materials with the free StudySmarter app

    Sign up for free
    1
    About StudySmarter

    StudySmarter is a globally recognized educational technology company, offering a holistic learning platform designed for students of all ages and educational levels. Our platform provides learning support for a wide range of subjects, including STEM, Social Sciences, and Languages and also helps students to successfully master various tests and exams worldwide, such as GCSE, A Level, SAT, ACT, Abitur, and more. We offer an extensive library of learning materials, including interactive flashcards, comprehensive textbook solutions, and detailed explanations. The cutting-edge technology and tools we provide help students create their own learning materials. StudySmarter’s content is not only expert-verified but also regularly updated to ensure accuracy and relevance.

    Learn more
    StudySmarter Editorial Team

    Team Economic Performance Teachers

    • 12 minutes reading time
    • Checked by StudySmarter Editorial Team
    Save Explanation

    Study anywhere. Anytime.Across all devices.

    Sign-up for free

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

    Join over 22 million students in learning with our StudySmarter App

    The first learning app that truly has everything you need to ace your exams in one place

    • Flashcards & Quizzes
    • AI Study Assistant
    • Study Planner
    • Mock-Exams
    • Smart Note-Taking
    Join over 22 million students in learning with our StudySmarter App