The Relationships Between Government Objectives & Policies (Edexcel IGCSE Economics)
Revision Note
Trade-off Between Macroeconomic Objectives
Policy decisions by governments often create trade-offs in other macroeconomic objectives
Achieving one objective may come at the cost of worsening progress in another
There may be an opportunity cost of pursuing one macroeconomic objective
The trade-offs between macroeconomic objectives
Trade-off | Explanation |
|---|---|
Low unemployment and inflation |
|
Economic growth and inflation |
|
Economic growth and environmental protection |
|
Inflation and the current account on balance of payments |
|
Worked Example
Which one of the following is a possible impact of economic growth?
A. A reduction in employment
B. An increase in pollution
C. A reduction in investment
D. A reduction in a budget surplus
The correct answer is B. An increase in pollution.
The extra economic activity may result in greater emissions that cause pollution
A is incorrect because economic growth will lead to an increase in employment
C is incorrect because investment should rise as business confidence levels rise during growth periods
D is incorrect because economic growth leads to greater profit and income levels, so government tax revenue should rise
Policy Conflicts and Trade-offs
As well as the trade-offs that exist in achieving the different macroeconomic objectives, there are trade-offs and conflicts that occur with the use of demand-side and supply-side policies
Example 1:
Raising interest rates (contractionary monetary policy), eases demand-side inflationary pressure but raises the cost of borrowing for firms, reduces investment and therefore slows down economic growth
Example 2
An increase in government spending (expansionary fiscal policy) can increase economic growth
Conversely, it may cause a shortage in total supply as government spending causes excess demand in the economy, leading to inflation
Example 3
Increased environmental policies may lead to a fall in achieving economic growth
E.g. Laws exist to prevent logging, protect biodiversity and reduce deforestation. However they increases cost-push inflation and reduce economic growth
Example 4
Supply side policies may try to reduce business costs through deregulation, which can reduce the effectiveness of policies designed to protect the environment
E.g. If a government deregulated emission limits for air pollutants emitted by factories or power plants, it would increase global warming
Exam Tip
When assessing demand-side and supply-side policies, it is important to consider them in totality. Government and central banks will use a combination of policies to address economic issues. So, even if the question asks you to evaluate the use of an individual policy (e.g. fiscal policy), you should include alternative policies that may achieve the same aim in your answer to provide balance.
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