Performance Evaluation on the Macro Level

To evaluate macroeconomic performance we need different indicators. Let’s discuss the most important economic indicators by which we can evaluate the performance of the economy as a whole or simply judge the overall health of an economy.

1- Gross Domestic Product (GDP): the market value of all final goods and services produced within the boundaries of the domestic economy during a year.

Based on this indicator we can rank world economies.

For example: based on Nominal GDP, the top 3 world economies (2019) are;

1. United States: U.S. Nominal GDP: $21.44 trillion (23.6% of world GDP)

2. China: China Nominal GDP: $14.14 trillion (15.6% of world GDP)

3. Japan: Japan Nominal GDP: $5.15 trillion (5.7% of world GDP)

But, what if we have to countries with the same GDP, do you think they have the same level of welfare or well-being?

Absolutely no, this is because they probably have different size of the population, so we have to calculate GDP or income per capita;

Real GDP per capita = Real GDP/size of population

The higher the GDP per capita, the higher is the economic welfare.

2- Economic Growth: this economic indicator is used to track the economic progress from a year to another, it is calculated as follows,

Economic Growth = (Real GDP of the current year – Real GDP of the previous year)/ Real GDP of the previous year.

By economic growth, we can track the performance of the entire economy, whether it is in the expansion phase of slip into recession, and this could be represented by the business cycle.

But, we have also to measure the population growth rate this is because, if the population growth rate is higher and faster than the economic growth rate, this means that population growth hinders all economic growth efforts and the economy is probably suffering from inflation.

Inflation: is a continuous increase in the general price level, it could be measured by GDP deflator or consumer price index (CPI)

3- Gini Coefficient: it is a metric (greater than zero and less than 1) used to measure the degree of inequality of income distribution among members of the society.

Sometimes the GDP or national income of a nation is high, but the majority of income and wealth are concentrated on the hands of a small number of society members. Do you think economic welfare is high in this case?

So, it is not a matter of high income or GDP, it is about how income is distributed among members of society.

- The closer the Gini coefficient to 1, the higher the degree of income equality or the lower the inequality among members of the society and vice versa. 

Because GDP is not a perfect measure of welfare, it is a pure economic indicator since it ignores or doesn’t measure some aspects that heavily affect the welfare of the society such as level of crime, level of education, level of health care, and etc.

Now we have to move to a more comprehensive indicator which is one of the most important economic development indicators that is called Human Development Index (HDI).

4- Human Development Index (HDI): is a statistic composite index of life expectancy, education (Literacy Rate, Gross Enrollment Ratio at different levels and Net Attendance Ratio), and per capita income indicators, which are used to rank countries into four tiers of human development. A country scores a higher HDI when the lifespan is higher, the education level is higher, and the gross national income GNI (PPP) per capita is higher.

Source of definition: https://en.wikipedia.org/wiki/Human_Development_Index

In fact, there are a lot of macroeconomic indicators that are used by investors and politicians to take decisions. We can discuss them later in the incoming articles.