Understanding Macroeconomic Policy Objectives: Magic Square and Hexagon Explained

Six macroeconomic policy objectives exist in an economy that are systematically pursued. These six objectives are symbolized by the magic square and the magic hexagon frameworks, which encapsulate the national economy’s four quantitative and two qualitative goals. The overarching intention of these economic policy measures is to optimize the overall societal and economic welfare of the economy. This framework categorizes and prioritizes the diverse economic policy goals and measures essential for achieving a balanced and prosperous economy. Much of macroeconomic analysis focuses on the four quantitative goals, but the analysis of qualitative macroeconomic objectives has gained momentum as climate change and global challenges grow.

Understanding Macroeconomic Policy Objectives

What should you understand by Magic Square and Hexagon, including economic policy goals and measures in macroeconomics? According to its economic order, every economy pursues four quantitative and two qualitative economic policy goals, which sometimes amplify or inversely affect each other. Quantitative means that the achievements are measurable in quantities, while qualitative implies that the goal achievement describes a non-quantifiable state of the world. The magic hexagon is the extension of the magic square to incorporate the qualitative goals of an economy, leading to two dimensions of macroeconomic goals: quantitative and qualitative.

Each relevant goal of the national economy requires economic policy measures to be implemented by the economic agents, e.g., austerity measures, market competition, provision of public goods, and incentives to consume. The resulting economic policy measures aim to maximize the common social welfare and economic welfare of an economy. Consequently, all economic agents are decision-makers in achieving the macroeconomic policy objectives.

The Magic Square – 4 Quantitative Macroeconomic Policy Objectives

The magic square consists of four macroeconomic economic policy goals: steady economic growth $g_t$, a high level of employment $u_t$, a stable price $P_t$, and a steady foreign trade equilibrium $NX_t$.

Objective 1: Steady economic growth

Steady economic growth means that an economy should always have a stable and positive real gross domestic product (GDP) growth rate. Assume that $Y_t$ is the real GDP-Level of your Country at Time $t$. The real GDP-growth rate for Period $t$ can be defined as follows:

g_t=\frac{(Y_t -Y_{t-1})}{Y_{t-1}}

Objective 2: High employment level and low unemployment rate

A high level of employment also promotes low unemployment rates. Three variables are needed to quantify the unemployment rate $u_t$: the number of persons capable of working $L_t$, the number of employed $N_t$, and the number of unemployed $U_t$.

u_t=\frac{U_t}{L_t}=\frac{(L_t-N_t)}{L_t}=1-\frac{N_t}{L_t}

Objective 3: Stable price level and low inflation

A stable price level ($P_t$) also requires a low rate of inflation $\pi_t$ or price stability. The task of monetary policy is to ensure price stability in the European Union (EU). This is controlled by the European Central Bank (with the Deutsche Bundesbank as a member) in Frankfurt am Main in the Eurozone (Monetary Union). Before the foundation of the Monetary Union, each country controlled its monetary policy. In the monetary union, monetary policy is coordinated collectively. The inflation rate can be calculated as follows:

\pi_{t}=\frac{P_t-P_{t-1}}{P_{t-1}}

Objective 4: Steady foreign trade balance and a current account surplus

Steady foreign trade equilibrium ideally results from the current account showing neither a surplus nor a deficit.

The Magic Hexagon – 2 Qualitative Macroeconomic Policy Objectives

The magic hexagon is created by adding two qualitative macroeconomic economic policy goals to the magic square: the fair distribution of wealth, income, assets, and resources and the sustainable use of environmental resources.

NX_t=X_t-\frac{IM_t}{\varepsilon}=0

Objective 5: Principle of equity in the distribution of wealth and Resources

Establishing specific quantitative targets guided by the principle of justice is essential to achieving the equitable distribution of wealth, income, assets, and resources. Achieving equity requires ensuring all generations have equal access to opportunities, creating a fair and balanced economic environment.

Objective 6: Principle of sustainability and environmental protection

The sustainable use of natural and non-natural resources requires the correction of quantitative targets by means of the sustainability principle to guarantee the necessary environmental protection for all generations.