The five recommended economic criteria in evaluating a national economy

By | July 13, 2013

1.1    Gross Domestic Product (GDP)

 

Gross Domestic Product (GDP) is a measure of the total value of all goods and services produced in the country (Downing & Clark 2010, p.455). A contrasting concept is the GNP. While GDP measures the output of goods and services within the borders of the country. Gross National Product (GNP) measures the output of a nation’s factor of production, regardless of whether the factors are located within the country’s borders (quickmba.com 2011). There are several key advantages of using the GDP in measuring the economies across different nations.

 

1.1.1            Market size

 

This first advantage of using the Gross Domestic Product (GDP) in describing the economies is that it directly reflects the size of the economy by taking into consideration of the overall production volume of the whole country. And because of the existence of the economy of scale, a large economy and a large market would mean a lot to the companies. The measuring of the size of the economy in term of GDP could be used by companies and governments to anticipate the future development of the economy because normally the size of the economy in term of per capita size could mean the future growth potential of the economy.

 

1.1.2            Measuring the growth of economy in an output perspective

 

The Gross Domestic Product growth rate could be calculated to measure the increase in value of the goods and services produced by an economy (tradingeconomics.com 2011). The growth rate of the economy could be measured by the measuring aggregate output of the product in the nation.

 

1.2    Unemployment rate

 

The unemployment rate can be defined as the number of people actively looking for a job divided by the labor force. Changes in unemployment depend mostly on inflows made up of non-employed people starting to look for jobs, of employed people who lose their jobs and look for new ones and of people who stop looking for employment. Related terms are the labor force, the participation rate and the employment rate. The labor force is defined as the number of people employed plus the number unemployed but seeking work (tradingeconomics.com 2011). The measurement of the unemployment rate have a number of significant in measuring and reflecting the economy performance of a nation.

 

1.2.1            Measuring the wasted opportunities for an economy

 

According to Steven Kates (2011), in purely economic terms, unemployment is a measure of wasted opportunities for an economy. Those who are unemployed could have contributed to the productive potential of the economy since their being unemployed has deprived the community of the goods and services that could have been produced had they found productive work. Hence, the calculation of the unemployment rate could help the government to access the wasted opportunity for and economy and such waste is also room for future further utilization and resource exploitation that assist the economy to sustain rapid development.

 

1.2.2            Measuring the performance of the economy during a specific time

 

Since continual economy development tend to reduce the unemployment rate if the labor market does not encounter a faster growth, and also because the larger the working class is, the bigger the society aggregate effective demand would be. In addition, since high unemployment rate also affect the political stability and business environment which tend to have in-depth impacts over the normal business activities, hence the unemployment rate is critical to the measurement of the economy as well as political performance during a specific period.

 

1.3    Consumer Price Index

 

The consumer price index (CPI) is the government’s key inflation indicator and it is usually the indicator of inflation that we may think about. It is a measure of the overall cost of goods and services bought by a typical consumer. This index is based on data related to consumer spending habits and the prices paid for a variety of goods, including food, clothing, medications, energy, homes and furnishings (Stonecash, Gans, King & Mankiw 2011, p.162). CPI could measure the economy performance in the perspective of the consumer with a number of advantages.

 

1.3.1            Historical Value

 

Usually historians try to assemble as complete an analysis as possible of previous decades. This includes average prices that people paid for products and services in different eras. They can determine whether there were significant increases in food prices during years with recorded crop failures. Historians and genealogists use the CPI information to gain a perspective between previous generations’ salaries and the prices they paid for goods and services (chron.com 2011). Therefore, the CPI level in the histories could be used to adjust the income and also the wealth level of the generations and thus make the comparisons across several centuries become possible.

 

1.3.2            Basis for government policies making

 

Government policies in general would have direct and indirect impacts over the economic life of the people living in the nation, therefore it would be important for the governments to access the impact of their new policies or policy changes. And one of the key indictors is to refer to the country’s historical and current Consumer Price Index. For example, if one policy would probably lead to the continual raise of the already historically high inflation rate, it is obviously not recommended that the government would still pass the policy and put it into practice.

 

1.3.3            CPI measurement changes with consumer habits

 

Take Seattle CPI calculation as an example. The CPI measures the average change over time in the prices paid by urban consumers for a representative selection of consumer goods and services. The selection of goods and services (commonly referred to as the “market basket”) is based upon actual consumer purchasing patterns, which are determined from a survey of consumer expenditures. Goods and services in the market basket are weighted according to the share they constitute of total consumer spending. The major expenditure categories are: Food and beverages, Housing, Apparel, Transportation, Medical care, Recreation, Education and communication and Other goods and services (seattle.gov 2011). And because the selection of goods and services or the market basket is based upon actual consumer purchasing patterns which would be checked periodically, the CPI measurement changes with consumer habits and reflect the true living cost of and price level sustained by the consumers.

 

1.4    Money supply changes

 

In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. Money supply data are recorded and published, usually by the government or the central bank of the country. Public and private sector analysts have long monitored changes in money supply because of its possible effects on the price level, inflation and the business cycle. The narrowest measure, M1, is restricted to the most liquid forms of money; it consists of currency in the hands of the public; travelers checks; demand deposits, and other deposits against which checks can be written. M2 includes M1, plus savings accounts, time deposits and balances in retail money market mutual funds (newyorkfed.org 2008). M3 is an even broader measure that includes close substitutes for money. M3 includes M2 plus large time deposits, repossessions of maturity greater than one day at commercial banks, and institutional money market accounts (mindxpansion.com 2011).

 

1.4.1            Anticipating the consumption trend

 

Money supply changes have influential effects on economic activities. An increase in money supply stimulates increased spending because it puts more money in the hands of consumers which makes them feel wealthier, stimulating them to increase their spending. Vice Versa. A decrease in money supply or a decrease in the growth of money supply, results in decreased spending because there is less money in the hands of consumers, stimulating them to decrease their spending. This causes a decline in economic activity and can cause disinflation (reduced inflation) or deflation (falling prices) (mindxpansion.com 2011). And because the money supply changes would tend to be followed by the consumer behaviors changes, the measuring of the indicator could be used to anticipate the changing consumption trend among the consumers.

 

1.4.2            Measuring the risks of monetary policies

 

Because an increase in money supply can also have negative effects on the economy, it causes the value of the dollar to decrease, making foreign goods more expensive and domestic goods cheaper. With the complex global economy, this causes foreign materials and goods to become more expensive for customers (wisegeek.com 2010). In another word, the surplus of money supply could directly contribute of the general price increase and result in higher risks in the economies. Hence monitoring the money supply changes could be of great importance to check the health of the economy.

 

1.5    Gini coefficient

 

Gini index measures the extent to which the distribution of income or consumption expenditure among individuals or households within an economy deviates from a perfectly equal distribution. A Lorenz curve plots the cumulative percentages of total income received against the cumulative number of recipients, starting with the poorest individual or household. The Gini index measures the area between the Lorenz curve and a hypothetical line of absolute equality, expressed as a percentage of the maximum area under the line. Thus a Gini index of 0 represents perfect equality, while an index of 1 implies perfect inequality (worldbank.org 2011).

 

1.5.1            Provide a reference evaluating the tradeoff between economic development and cost of economic development

 

As the emerging economies continue to surprise the world, such as some Asian developing countries, concerns about widening inequalities in standards of living, and the poor being bypassed by growth, are becoming widespread. And although inequalities exist in many dimensions relevant to human welfare, including access to basic health care and education, political voice and justice (Asian Development Bank 2007, p.87). But the worrying trend could be mainly expressed in the income equality. As a result, Gini coefficient as an indicator calculating the degree of income inequality could be adopted to measure the tradeoff between economic development and cost of economic development. For instance, if the implementation of a government policy would be anticipated to boost only little economic growth but  would result in more fortune to be concentrated in the hands of the rich people resulting in the degradation of the people’s life, such policy is not good to be implemented.

 

1.5.2            Comparison with other countries

 

Different nations and different groups of nations and regions could all use the Gini coefficient to measure the income inequality and comparisons could be made among these nations without considering about too many other factors because Gini coefficient calculation does not have strong correlation with the degree of degree of economic development, size of population and economic structures because it only takes into consideration of the conditions of the income distribution.

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