Home | Business News | Browse by Publication | A | American Economist

International comparison of economic performance index: the case of the USA, Japan and Korea.

Article Excerpt
I. Introduction

Since the economic performance of a nation is reflected in many economic variables, we should consider all relevant economic variables for exact measurement of the economic performance of the nation as a whole. The same is true for the evaluation of economic policies. Suppose, for example, the government plan to increase the new housing supply by 50%. In order to evaluate this policy, we should examine effects of this policy on all relevant economic variables such as national income, price, employment, balance of trade, wage rate, ... etc. The problem is how many variables should be considered in what way.

There are many ways of measuring the economic performance of a nation as a whole. One of widely used methods is to use the "misery index." The misery index measures the state of the economy by summing up the inflation rate and the unemployment rate. While there are many variations of the misery index, they share basically the same advantages and disadvantages. The major advantage of these indices lies on the simplicity of calculation. Since the misery index considers domestic variables only, however, it has the limited power in explaining the performance of the economy when its degree of openness is large.

Another method of measuring the economic performance of a nation is to use the "diamond model." The diamond model evaluates the performance of the economy through the diamond graph, the shape of which is dependent upon the four economic variables of economic growth rate, inflation rate, unemployment rate, and the ratio of current account relative to GDP. The advantage of the diamond model is in considering both domestic and foreign variables. The major disadvantage of the diamond model is the impossibility of the international comparison. In order to perform the international comparison, it is necessary to construct the single index by using four economic variables used in the diamond model.

This paper constructs the economic performance index (EPI) comprising four economic variables of economic growth rate, inflation rate, unemployment rate and the ratio of current account relative to GDP. In constructing the EPI, the structural change of each country will be explicitly considered. By using EPIs of the USA, Japan and Korea, intranational analyses and international comparisons will be performed.

II. Surveys on Methods of Measuring the Economic Performance

There are basically two methods of measuring the economic performance of a nation as a whole. One is the misery index and the other is the diamond model. The misery index is the simple sum of the inflation rate and the unemployment rate.

Let U and p denote the unemployment and inflation rate, respectively. Then, the misery index, M, can be expressed as

M = [absolute value of p] + U, (1)

where [parallel] indicates the absolute value. This index was initially derived from the Phillips curve by A. Okun as a general index representing the healthy state of the economy. Since the unemployment rate is generally inversely related to the inflation rate, as in the Phillips curve, the unusually high misery index reveals that the government failed to solve even one of the two problems of inflation and unemployment. This index is famous for its correct prediction of the likelihood of reelection of incumbent US Presidents after World War II. Most US Presidents with the misery index above 12-13% during their terms of office are found to have failed in the reelection.

Golden, Orescovich and Ostafin (1987) and Wiseman (1992) modify the misery index by using the natural unemployment rate, [U.sub.n]: The variations are as follows.

[M.sub.1] = [absolute value of p] + [absolute value of U - [U.sub.n]] (2)

[M.sub.2] = [absolute value of p] + [absolute value of U - [U.sub.n]](U [greater than or equal to] Un) = [absolute value of p] (U < [U.sub.n]) (3)

The subscripts 1 and 2 in [M.sub.1] and [M.sub.2] are introduced for their distinction from the original misery index. Equation (2) means that, as unemployment rate cannot be below 0, only the difference between the unemployment rate and the natural unemployment rate rather than the unemployment rate itself should be considered in evaluating the economic performance. Equation (3) indicates that the unemployment rate does not affect misery index if it is below...

View this article FREE - Now for a Limited Time, try Goliath Business News
Free for 3 Days!