Magic square and hexagon

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Economists grasp Economic goals and measures in one magic square and hexagon. In this article we will first explain how to distinguish a magic square from a magic hexagon in terms of economic policy. Second, learn how a magic quadrilateral summarizes the quantitative goals of economic policy and finally we address the qualitative goals that complete the magic hexagon. A magic quadrilateral and hexagon stand for the symbol of the economic policy challenges of society after all. In reality, we cannot observe a magic hexagon or quadrilateral, but we can still imagine it.

Difference between magic quadrilateral and hexagon

First, what should you now understand by magic square and hexagon? Second, what are the economic policy goals and measures of an economy? Thus, these and other core policy issues are topics in macroeconomics. Therefore, the statement begins like this: Each economy according to its Economic order pursues a series of quantitative and qualitative economic policy goals. And each relevant objective of the national economy thus requires a set of economic policy measures.

This is because the resulting economic policy measures aim to achieve the social common good as well as economic welfare of an economy to maximize. Thus, the qualitative and quantitative categories of objectives together form a hierarchy of objectives: the magic quadrilateral and the magic hexagon. The quantitative economic policy objectives are described under the magic quadrilateral in summary, while the qualitative goals add two more goals to the magic quadrilateral, in order to achieve a magic hexagon to shape.

"What is magical about this from the point of view of economists?? These are presumably the resulting Target harmonies and Conflicting goals between the individual macroeconomic policy objectives of the magic quadrilateral and hexagon."

Hypothesis to verify

The magic quadrilateral – 4 economic policy goals

The magic quadrilateral consists of four macroeconomic economic policy goals:

  • First, to achieve steady economic growth for the national economy,
  • Second, achieving high levels of employment of resources,
  • Third, ensuring stable price levels through monetary stability,
  • and fourthly to achieve steady balance of foreign trade between economies.

Magic square and hexagon in economics

In the next step, we would now like to understand what exactly each economic policy objective means from the perspective of the German economy.

Goal 1: Steady economic growth

Steady economic growth means that an economy is always stable and positive real growth rate of the gross domestic product (GDP) should have. From the figure below, we can see that the German economy has always achieved stable and positive real growth rates. This happened despite the many economic crises (DotCom crisis 2000 – 2003, financial crisis 2007 – 2009 and the current Corona crisis because of the Corona pandemic from 2020 ). In the dot-com crisis, the German economy lost less output (GDP) than in the financial crisis followed by the Corona pandemic-related loss and real economic growth.

Year-on-year change in real gross domestic product (GDP) in Germany

Goal 2: High level of employment and low unemployment

A high level of employment also promotes a low unemployment. The second economic policy goal focuses on the employment of labor force in an economy. The labor force is defined as all persons of working age who are able to pursue both an employed and a self-employed activity.

We can observe a negative unemployment trend in Germany between 2005 and 2021, which means that there is a positive employment trend. The unemployment rate fell from 11.7% (2005) to 5% (2019) and has risen to around 6% due to the corona pandemic. The reason why the German labor market is developing so positively is that demographic change and demographic dynamics in Germany are leading to a shortage of skilled workers in all sectors of the economy.

The annual average unemployment rate in Germany

Other factors that have supported the economic development of the German labor market after the 2008 financial crisis are:

  • the ECB’s low interest rate policy in the EU,
  • the weak euro against the dollar, the Swiss franc and other currencies
  • EU fiscal pact
  • the strict budget and debt policy of the German government
  • positive development of German exports to the EU and the rest of the world
  • u.a.

2.1: Change in tax policy in Germany in 2020 and impact on employment nuveau

Changes in economic policy of the state can be Employment level and the Unemployment rate impact. For example, the following changes can lead to changes under certain conditions. In 2020, the Company pension beneficiaries health insurance contributions were relieved (increase in the Free allowance for pension payments by €4.50), all taxpayers from income tax (increase in the Basic allowance by €400.00 per year), all Business travel from income tax under certain conditions (increase of Meal allowance by €4.00 per day for business trips) and the Employees Will receive a minimum wage increase of €0.16 per hour worked (increase in the Minimum wage from €9.19/h to €9.35/h)

What will change financially in 2020, pension allowance, tax allowance, food allowance and minimum wage

2.2: Targets of economic policy measures on employment

The economic policy measures of the fiscal state are aimed at increasing the disposable income of private households and possibly increasing domestic private consumption by households. The term fiscal state refers to the state that is responsible for the expenditure and revenue policies of the entire state system is responsible. Tax relief means that the government forgoes potential tax revenues, but at the same time strengthens domestic private consumption by households and possibly indirectly investment activity by companies. Cautiously assessed and all other things being equal (ceteris paribus), the increase in private consumption should lead to an increase in GDP (See Objective 1) and employment levels.

Goal 3: Stable price level and low inflation rate

Stable price level also requires low inflation rate resp. Price stability. Ensuring price stability in the European Union (EU) is the task of monetary policy, which is controlled by the European Central Bank (with the Deutsche Bundesbank as a member) in Frankfurt am Main in the euro zone (monetary union). Before the establishment of monetary union, each country managed its own monetary policy. In the monetary union, monetary policy is coordinated jointly.

Year-on-year development of consumer prices in Germany. Inflation rate

Since the 2008 financial crisis, the inflation rate in Germany has been below 2 percent per year for the most part, while the ECB’s inflation target was 2 percent.

Fear of deflation in 2020 has turned into fear of inflation in 2021. In 2020, the economy expected an inflation rate of 0.5%, but the inflation trend has turned positive since January 2021, with the inflation rate rising to 3.9% in August 2021 compared to the August 2020. Nevertheless, people expect a certain degree of price stability, which is the role of the ECB in the EU. Fears that the ECB might change its monetary policy are limited, as the ECB continues to adhere to its low interest rate policy. The incentive to hold deposits with banks is expected to fall further and the incentive to invest either in consumption or in other forms of investment to z. B. in risky assets such as real estate and equities.

The development of consumer prices in Germany compared with the same month of the previous year. Inflation rate

Goal 4: Steady external trade balance and current account surplus

Steady foreign trade equilibrium ideally arises from the fact that the current account balance is neither a surplus nor a deficit has.

Magic square and hexagon

The magic hexagon – 6 economic policy goals

The magic hexagon is created by the fact that the magic quadrilateral is extended to include two qualitative macroeconomic economic policy goals: equitable distribution of wealth, income, assets and resources, and sustainable management of environmental resources.

Goal 5: Equity principle 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, to guarantee equal opportunities for all generations.

Goal 6: Sustainability principle and environmental protection

Sustainable use of both natural and non-natural resources requires correction of quantitative targets by means of the Sustainability Principle, to achieve the necessary Environmental protection to guarantee equal opportunities for all generations.

Goal harmonies and trade-offs among economic policy goals

Multiple goal harmonies and trade-offs exist between individual economic policy goals and measures. The first trade-off is between the magic quadrilateral and the magic hexagon. While the magic quadrilateral emphasizes quantitative goals such as unemployment, inflation, economic growth and foreign trade equilibrium, the magic hexagon achieves qualitative goals such as sustainability and equity, z. B. For example, should the fight against unemployment be both sustainable and equitable.

Critical questions for the search for goal harmony and goal conflicts

What does such sustainable and equitable employment look like in a global world? Can inflation be tackled without further effects on unemployment, economic growth, sustainability, equity and global trade balance? The latter question shows some conflicting goals within the magic quadrilateral and hexagon, cf short-run and long-run Phillips curve, Okunsche’s Law, SDGs 2030. Would the global community be satisfied with zero inflation? Is a long-term zero interest rate policy of the European Central Bank sustainable and fair? Can an endless increase in the production of goods be sustainable and equitably? Is climate change to be taken seriously? From such questions, inspiration can be found for the search for goal harmonies and goal conflicts. By critically questioning the macroeconomic actions and measures of the economic agents (households, companies and the state) in an economy, it is possible to solve the problem zone of achieving certain economic policy goals.

Alternating effects of actions and measures should be well understood

Economists observe the macroeconomic behavior of economic agents and the situation of economic policies in order to explain possible cause-effect between actions of economic agents the realization of an environmental state in terms of the dimensions of the magic square and hexagon. For example, a country increases production may be due to the fact that the labor force or the production goods (capital) have become more productive due to technological advances or the quantitative use of resources has increased. The increased production would rather have effects on the remuneration of the factors of production in the case of technical progress without reducing unemployment (increasing capital intensity) and in the case of increased use of more workers leading to a reduction of unemployment (more capital leading to an increase in capital intensity through a higher savings rate and higher investment by firms).

State actions take place within the framework of fiscal policy by means of cyclical measures and within the framework of monetary policy by means of the monetary policy measures of the central banks (interest rate control and money supply control). Entrepreneurial activities are carried out by risk-taking private and state enterprises through investment activity and the holding of capital for the production of consumer goods for the national economies. All people in society exist in your private life as private households and act by means of consumption decisions and income generation intentions.

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