Measuring the Macroeconomic Objectives: Economic Growth, Unemployment and Inflation

Macroeconomics provides government policymakers with a set of tools that can be employed to help achieve certain macroeconomic objectives deemed desirable for a nation. For an economy to be considered healthy, three objectives must be met:

  • Economic growth: defined as an increase in the nation’s output of goods and services over time
  • Low unemployment: meaning that nearly everyone who is willing and able to work should be able to find a job, and
  • Low inflation: meaning that the average price level of the nation’s goods and services should not increase too rapidly over time.

Measuring these three objectives requires the use of some simple mathematical formulas. Once they are known, we can use the basic production possibilities curve diagram to illustrate their effect on a nation’s potential output and its current equilibrium level of output.

This lesson will define the three macroeconomic objectives, show how it can be determined whether or not they are being achieved, and use a PPC model to illustrate them.

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The Short-run Phillips Curve

This video lesson introduces a basic Macroeconomic model showing the short-run tradeoff that exists between inflation and unemployment in nation’s economy. By examining the effect that a shift in Aggregate Demand has on the average price level and the level of output and employment, we observe a simple tradeoff: lower unemployment generally comes at the cost of higher inflation, while lower inflation may require higher unemployment.

The following blog posts provide some real world applications of the Phillips Curve theory:

 

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The Long-run Phillips Curve

The Long-run Phillips Curve

In the second lesson on the Phillips Curve model we will further explore the relationship between unemployment and inflation in an economy, this time examining what happens in the long-run, or the flexible-wage period, following a change in aggregate demand in an economy. Will the tradeoff between inflation and unemployment exist even once wages and prices have had time to adjust to the level of demand for a nation’s output?

We will find that, in fact, as an economy self-corrects from changes to aggregate demand and output returns to its full employment level, the unemployment rate will always return to its natural rate, even as inflation rises and falls with demand in the economy.

 

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Different Tax Systems’ Effects on Income Distribution (part 1)

There are two things in life that are guaranteed: Death and… taxes. But how a tax affects individuals and society depends on the tax system in place in a particular country. Three tax systems exist, often alongside one another, in different countries and to varying degrees. These are:

  • Progressive income taxes
  • Proportional income taxes
  • Regressive Consumption taxes

This video will outline the different effects of the three tax systems on three hypothetical individuals earning different levels of income.

Part one shows how to calculate the amount of tax paid and the average tax rates under a progressive marginal income tax system and a proportional tax system.

Part 2 will calculate the amount of tax paid and the average tax rates on three individuals under a consumption tax system and explore the impact of the three different tax systems on a nation’s income distribution using a Lorenz curve.

In the second part of this lesson we will calculate the impact of consumption taxes on the amount of tax paid and the average tax rate of three hypothetical individuals. We will then compare the three tax systems (progressive marginal income taxes, proportional income taxes and consumption taxes) on a country’s income distribution using a Lorenz curve.

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