Traditionally, the key measures of economic performance in macro-economics include:
- Economic growth – real GDP growth.
- Inflation – e.g. target CPI inflation of 2%
- Unemployment – target of full employment
- Current account – satisfactory current account, e.g. low deficit.
Of these indicators, economic growth is usually the most importance and given the greatest credence for economic performance. It is frequently used for international comparisons and is probably the most prominent statistic. Politicians can use GDP statistics as a trump card – as if a quarterly growth of 1.0% vindicates all economic policy.
However, real GDP has several limitations. Not least is the fact that it is not always a reliable guide to living standards. With stagnant wages, cost push inflation and a rising population, average median incomes have fallen in the recent decade. Between 2009-10 to 2011-12 median incomes fell in the UK cumulatively by 5.9% from, taking average incomes back to levels seen a decade earlier. It means that despite the recovery in real GDP, some people feel that they are not benefiting from economic recovery.
Indicators for economic performance
The Fabian think tank believes that median income would give a better indicator to overall economic performance. They also state other indicators which would help give better impression of economy.
- Rate of National debt reductions
- Level of greenhouse emissions
- Income inequality
- Labour productivity
- Intermediate skills
- Affordable homes
- Incidence of low pay
- Employment rates
Pros and cons of GDP
For all its limitations, GDP is widely used across the world. It does gives a rough guide to the level of economic activity. The fall in GDP of 2008/09 was indicative of the recession. Prolonged growth of real GDP 1993-2007 was indicative of the relative prosperity and rise in living standards.
For all its faults GDP does give a useful guide to the economic cycle and is a indicator for monetary policy and fiscal policy.
GDP is also measurable – it is objective. For example, we could go to the other extreme and start a survey asking people whether they are happy with their economic situation? This may give an interesting insight into economic welfare. But, a raw statistics, such as GDP gives more confidence than a survey – which by its very nature is subjective.
The downside of GDP come when it is relied on too much. Rising GDP, could hide a fall in average incomes and a rise in poverty. GDP doesn’t take into account income distribution. Growth in GDP could primarily benefit the top income strata.
For example, a problem the Fabian group identify is the rise in UK housing costs. In the past few decades, UK Housing has become less affordable. This is good new for home owners who see a rise in wealth and rents. It is bad news for people struggling to buy or pay rents. This is a classic example of how a rise in GDP can cause rising living standards for some, but falling living standards for others.
Don’t forget population. At the very least, we need to take into account population and real GDP per capita. The UK’s rising population is one reason for increasing GDP.
All statistics are limited
One problem is that all statistics have some limitation. Even employment rates can be partially misleading. For example is the employment temporary or permanent? Employment figures have been better than expected, but there has been a rapid rise in zero hour contracts causing an increase in labour market insecurity.
When I see national debt used as a measure of living standards I always start to worry. Countries which made enthusiastic attempts to cut their budget deficit, such as Greece and Portugal have seen a dramatic fall in living standards. It seems mistaken to use debt reduction as a measure of living standards when debt itself might be the necessary consequence of dealing with a demand side shock.
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 similar statistics to give a better overall picture. In this case median income is definitely an important indicator to economic welfare. Similarly when looking at unemployment. It is insufficient to use just the raw unemployment data. We need to know the kinds and types of jobs created.
