Answer to Question #97266 in Macroeconomics for Buhle Mabanya

Question

How are each of the below objectives measured?

Objective1: Equitable or Redistribution of Wealth (Income)
Objective 2: Price Stability
Objective 3: External Stability or Balance of Payments

Answer 1

Objective 1

Equality or redistribution of wealth is measured using the Gini coefficient, and Lorenz. Lorenz curve plots percentiles of the population on the x-axis according to wealth and cumulative wealth on the y-axis (Parkin, 2019). If for instance, x-value is 50 and y-value is 20, it means that the bottom 50% of the population accounts for 20% of total wealth.

 Figure 1: Lorenz curve

Source: ‘Towards Data Science’

Gini coefficient is calculated from the Lorenz curve. It is obtained by dividing the area between the Lorenz curve and the line of equality by the total area under the line of equality (Parkin, 2019). The Gini index is between 0 and 1, where 0 means perfect equality, and 1 represent perfect inequality. For instance, in figure 1 above Gini coefficient is given by $\frac{A}{A+B}$

.Objective 2

Price stability refers to stable price levels of products in an economy. It is measured by consumer price index (CPI). It shows the average change in the price of a determined basket of goods over a defined period (Parkin, 2019).

$CPI=\frac{100(Cost of BasketT)}{Cost of Basket0}$

. Basket0 refers to a basket of goods of the base year, and BasketT refers to the basket of goods after time t. If CPI is equal to 100, it means that there is price stability, but if CPI is greater than 100, it means that there is an increase in the prices of products in the economy.Objective 3

External stability or balance of payment is a situation where income from export is sufficient to fund imports. Three accounts are considered when calculation balance of payment (BOP), they include;

1. A current account which is the addition of credits and debits on various merchandise trade

2.A capital account which involves acquisition or disposal of non-financial assets such as land.

3. A financial account, which involves international monetary outflows and inflows.

BOP is calculated by adding balances from the three accounts (Parkin, 2019). A positive BOP means that the economy is in surplus, a negative means deficit while zero BOP means that the economy is balanced.

 

 

 

References

Parkin, M. (2019). Macroeconomics. Harlow, England: Pearson.