The Magic Square and Hexagon of Macroeconomic Policy Objectives

The Magic Square and Hexagon of Macroeconomic Policy Objectives

What should you understand by Magic Square and Hexagon, economic policy goals, and measures in macroeconomics? The explanation begins like this: Every economy, according to its economic order, pursues a number of quantitative and qualitative economic policy goals. Each relevant goal of the national economy requires a series of economic policy measures. The resulting economic policy measures are aimed at maximizing the common social welfare and economic welfare of an economy. The qualitative and quantitative target categories together form a hierarchy of objectives: the magic square and the magic hexagon.

The quantitative economic policy goals are grouped under the magic square, while the qualitative goals extend the magic square by two additional goals to form a magic hexagon.

“What is magic about this from the perspective of economists? It is probably the resulting goal harmonies and goal conflicts between the individual macroeconomic economic policy goals of the magic square and hexagon”.

Hypothesis to Review

The Magic Square – 4 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 level of 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 growth rate of the gross domestic product (GDP). 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. To quantify the rate of unemployment $u_t$, three variables are needed; 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. Ensuring price stability in the European Union (EU) is the task of monetary policy. 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 own 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 fact that the current account shows neither a surplus nor a deficit.

The Magic Hexagon – 6 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

The equitable distribution of wealth, income, assets and resources requires the correction of quantitative targets by means of the principle of justice in order to guarantee equal opportunities for all generations.

Objective 6: Principle of sustainability and environmental protection

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

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