Macroeconomic objectives and how they are measured

Growth, inflation, unemployment and the current account; real GDP, GDP per head and PPP; recessions and output gaps; the HDI and the limits of GDP.

UK growth: 0.5% in a quarter.

UK real GDP grew by 0.5% in April to June 2026, after 0.6% in January to March. Over the same quarter the current account deficit narrowed to £19.9 billion, 2.5% of GDP (£11.3 billion excluding trade in precious metals). The first estimate for July to September is due on 12 November 2026.

What is the government trying to achieve, and how do we know if it is working?

Source: Office for National Statistics, GDP quarterly national accounts and Balance of payments, April to June 2026.

Four main macroeconomic objectives.

• Economic growth: a sustained rise in real GDP. Measured by the % change in real GDP.
• Low and stable inflation: the UK target is 2% CPI inflation.
• Low unemployment: measured by the ILO rate from the Labour Force Survey.
• A balanced current account: no large or lasting deficit or surplus on trade and income flows.

Others include a fairer distribution of income, balanced public finances and protecting the environment.

GDP and its adjustments.

GDP (gross domestic product) is the total value of goods and services produced in a country in a year.

• Nominal GDP is at current prices. Real GDP removes inflation. Real growth ≈ nominal growth − inflation.
• Real GDP per head = real GDP ÷ population: a better guide to living standards.
• Purchasing power parity (PPP) exchange rates adjust for different price levels when comparing countries.
• GNP (gross national product) measures the output of a country’s residents, wherever they produce it: GDP plus net primary income from abroad. GNI is measured the same way and is the figure used today.

The current account.

The current account records:

• trade in goods and services (exports minus imports)
• primary income: investment income such as profits, interest, dividends and pay from abroad
• secondary income: transfers such as foreign aid and money sent home by migrants

A deficit means more money flowing out on these than in. The UK usually has a surplus on services but a large deficit on goods.

GDP is not everything.

The Human Development Index (HDI) combines three things: income (GNI per head at PPP), health (life expectancy) and education (years of schooling). Some argue it shows development better than GDP alone.

Happiness and wellbeing surveys go further, asking people how satisfied they are with their lives.

Think first

Real GDP grows by 2% in a year. The population grows by 1%.

What has roughly happened to real GDP per head?

Real GDP per head grows by roughly the growth of real GDP minus the growth of the population: 2% − 1% ≈ 1%. More output shared among more people.

Step by step

1. Here is real GDP over three years. The dashed line is its trend: the long-run growth of productive capacity. Actual GDP moves around it.

   Check: To compare living standards between countries, the best of these is:

   Per head adjusts for population; PPP adjusts for different prices.

2. Here real GDP falls for two quarters in a row. That is the usual definition of a <b>recession</b>: two consecutive quarters of negative real GDP growth.

3. Above trend is a <b>positive output gap</b>: the economy is overheating, so inflation tends to rise. Below trend is a <b>negative output gap</b>: spare capacity and unemployment.

   Check: After the recession, GDP grows but stays below trend for a while. This is:

   GDP is growing, so it is not a recession, but it is below potential.

4. Put it together: growth is measured by real GDP, living standards by real GDP per head and the other objectives by inflation, unemployment and the current account.

A common mistake

GDP is rising here, so it is not a recession. A recession means real GDP is falling: two quarters of negative growth. Below trend is a negative output gap.

Exam question

Explain why real GDP per head may not be a good measure of living standards.

Model answer

Real GDP per head is real GDP divided by the population. It measures the average output per person, with inflation removed, so it is often used as a measure of living standards.

However, it is an average. If most of the extra income goes to the richest people, real GDP per head can rise while most people are no better off.

It also leaves things out. Unpaid work such as caring and volunteering is not counted, nor is the hidden economy. It ignores leisure: GDP can rise because people work longer hours. And it does not subtract damage to the environment, such as pollution, which lowers the quality of life.

So wider measures, such as the HDI, which also includes life expectancy and education, or surveys of wellbeing, can give a fuller picture of living standards.