BTL 793 - Kaldor Magic Square

 

The Banking Tutor’s Lessons

BTL 793                                                                   12-06-2025

Kaldor Magic Square 

The Kaldor Magic Square is a framework used to visualize the inter-relationships between four key macroeconomic objectives: economic growth, full employment, price stability, and a balanced balance of payments. 

It highlights the potential trade-offs between these goals, emphasizing that achieving one goal may come at the expense of another. 

Economic Growth refers to an increase in a country's overall production and output, often measured by GDP growth. 

Full Employment is a situation where virtually everyone who wants a job can find one, usually measured by the unemployment rate. 

Price Stability refers to maintaining a stable price level, often measured by controlling inflation, which is the rate at which prices for goods and services rise.

Balanced Balance of Payments is a situation where a country's total payments to other countries (imports) are balanced by its total receipts from other countries (exports). 

The square represents a diagram where these four objectives are plotted against each other, allowing economists to analyze how policies might affect different combinations of these goals. For example, policies aimed at stimulating economic growth might lead to increased inflation, while policies focused on controlling inflation might lead to slower economic growth. 

The Kaldor Magic Square is a valuable tool for understanding the complexities of macroeconomic policy, helping policymakers to identify potential trade-offs and make informed decisions. 

Sekhar Pariti

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