Goal Relationships: Examples & Magic Square

In the articles «Magic Square» and «Magic Hexagon» you have already learned a lot about the goals of economic policy. But what is the connection between these goals? Can they all be achieved simultaneously, or does one goal exclude the other?

Under target relationships one understands the formal and logical connections and dependencies, so-called interdependencies, between different economic policy goals.

Types of Goal Relationships

Between several economic policy goals different relationships can be identified. You can distinguish between three basic types of target relationships:

  • target complementarity/target harmony
  • target competition/Conflict of goals
  • target indifference

There is a hierarchy of goals. This means that some goals are preferred over others. This is necessary because not all economic policy goals can be met at the same time due to conflicting goals.

goal complementarity

In the case of goal complementarity, measures that improvement lead to one objective also lead to the improvement of another.

Here you can imagine reducing production costs or lowering the sales price in a company. Due to the reduced costs in production, the company is able to sell the product at a lower price. The two goals therefore support each other.

target competition

Target competition means that measures to improve a target variable limitations lead to other target values.

A company’s goal of making large investments competes with the goal of meeting savings plans.

target indifference

Target indifference means that measures to improve a target variable no consequences have other target sizes.

A company wants to increase its market share and reduce production costs. These two goals can be implemented independently of each other and do not affect each other.

Magic square & hexagon – digression

In order to better understand the target relationships, it is important that magic square and magic hexagon to know.

Each economy follows a series quantitative and qualitative economic policy goals. These require each economic policy measures. That’s what it’s supposed to do social common good and the economic welfare of an economy are maximized. Thus, the qualitative and quantitative target categories together form one goal hierarchy: the magic square and the magic hexagon.

That magic square contains the quantitative economic policy goalsthe magic hexagon expands this qualitative targets.

For more detailed information on the magic square and magic hexagon, see the related articles.

Magic square

The magic square consists of four economic policy goals:

  • Steady and reasonable economic growth: An increase of gross domestic product (GDP) from up to 5% annually is ideal for this. Excessively rapid economic growth would destabilize the price level, which could lead to a fall in employment and unbalance the external balance. The same applies to growth that is too low.
  • High level of employment: The prerequisite for this would be if there were almost no unemployment. The goal is reached when the unemployment rate at 3% or below.
  • a sstable price level ensures social peace. One inflation rate from 2% is ideal for this.
  • external balance is the prerequisite for good trade relations. A country’s import and export balance each other out. Decisive for this is the external contribution ratio.

Gross domestic product: The gross domestic product (GDP) is the measure of the economic performance of an economy over a certain period of time. The value of the goods and services produced domestically is measured.

unemployment rate: The unemployment rate provides information about the proportion of unemployed among all potential employees.

Inflation rate: The inflation rate is the percentage that determines the price level of manufacturers, consumers and other market participants. It is recalculated every year. Determining the inflation rate is intended to determine how consumer behavior changes over the course of a year and what role company prices play in this. The price level of everyday products, consumer durables and services are important.

External contribution ratio: The foreign trade ratio records the values ​​of the imports and exports of tangible and intangible goods and services of a country within an accounting period.

Magic Hexagon

The magic hexagon is one extension of magic square and therefore also consists of the economic policy goals of magic square. This is supplemented by the following objectives:

  • environmental Protection has been constitutionally guaranteed since 1994.
  • Fair distribution of incomewhich means that income and wealth are distributed fairly.

Since these are the qualitative goals of an economic policy, there are no indicators under which the goal is considered to have been achieved.

Target Relationships – Magic Square & Hexagon

You learned above that goals can reinforce, limit, or not influence each other at all. The following explains in more detail how each target relationship works.

With the goals of magic square and hexagon is a guide for the economic policy measures the Federal Republic of Germany. So these are the goals towards which politics should work. Are all goals of magic hexagon fulfilled, then there is one macroeconomic equilibrium.

That macroeconomic equilibrium is considered the goal of financial and economic policy. In § 1 of stability law from 1967 the four goals of economic policy are defined, which should lead to the achievement of an overall economic equilibrium. These were subsequently expanded to include two more targets (square and hexagon).

The term «magical«, since a permanent and simultaneous achievement of all goals is not possible in practice.

conflicting goals

Competitive relationships exist between the following goals:

  • Price level stability and economic growth: A economic upswing usually leads to an increase in prices (increased inflation rate). In order to counteract the price increase, the key interest rate would have to be raised. This would make loans and thus investments more expensive for companies. Economic growth would be hampered.

Economic upswing: An economic upswing is understood to mean the positive development of the economic situation, i.e. an economic upswing.

  • Price level stability and full employment: With a risethe inflation rate sint the unemployment rate.

If full employment is guaranteed, this means that everyone has a job. Consequently, there is no unemployment. If every employee has a job, purchasing power increases because there is more money in circulation. This results in increased demand, which also causes prices to rise. So if everyone has a job at the same time, prices cannot remain stable either.

  • Environmental protection and economic growth: Businesses are often constrained by environmental regulations. In order not to break the law, additional investments and expensive expenses have to be paid, which endangers economic growth.
  • Economic growth and fair income distribution: In a market economy, the state should intervene as little as possible in economic processes so that it is easier for companies to work independently and efficiently. This also makes it more difficult for the state to distribute wealth and income fairly. Without strict regulation, market powers can easily emerge that further sharpen the gap between rich and poor.

target harmonies

Achieving one economic growth and high employment levels has a positive impact on the achievement of the other goals. As you learned above, a small amount of inflation usually accompanies economic growth. With the increased prices, the level of employment also increases. A high level of employment in turn increases the purchasing power and tax revenues of the state. Without this cycle, trade would not work.

target neutrality

The following economic policy goals do not affect each other:

  • Environmental protection and external balance
  • environmental protection and price level stability

Goal Relationships – The Most Important

  • There are different types of goal relationships between economic policy goals:
    • Goal complementarity: The goals harmonize with each other.
    • Goal competition: The goals compete with each other.
    • Goal indifference: The goals have no influence on each other.
  • The magic square consists of four economic policy goals (quantitative goals).
  • The magic hexagon expands the magic square by two further economic policy goals (qualitative goals).
  • If all goals of the magic hexagon are fulfilled, then there is an overall economic balance.