O LevelEconomicsCambridge (CIE)Revision Notes4. Government & the Macroeconomy4.2 The Macroeconomic Aims of GovernmentConflicts Between Macroeconomic Aims

Conflicts Between Macroeconomic Aims (Cambridge (CIE) O Level Economics)

Revision Note

Steve Vorster

Trade-offs Between Macroeconomic Objectives

  • Policy decisions by governments often create a trade-off in the macroeconomic objectives

  • Achieving one objective may come at the cost of worsening progress in another objective

An Explanation of the Common Trade-Offs That Exist Between the Macroeconomic Objectives

Trade-off

Explanation

Economic Growth and Inflation

  • Increasing economic growth causes the economy to move closer to full employment

  • Prices for remaining resources are bid up leading to inflation which may outpace the target inflation rate of 2%

Economic Growth and Environmental Sustainability

  • Economic growth often increases pollution, negative externalities and the depletion of non-renewable resources

  • The higher the growth, the faster the depletion

Economic Growth and Inequality

  • During periods of high economic growth, the profits the owners of the factors of production receive are disproportionate to any increase in workers' wages leading to greater inequality

Economic Growth and Balancing the Current Account

  • Economic growth usually leads to higher incomes which leads to an increase in imports by households thereby worsening the current account balance

Low Unemployment and Low Inflation

  • The closer an economy moves to full employment the less workers will be available for hire and wage inflation will help increase overall inflation

Low Unemployment and Balancing the Current Account

  • When unemployment is low, incomes are higher and imports increase which worsens the current account balance

  • Additionally, with low unemployment wages tend to increase which increases costs of production for firms and if they increase their prices, then the level of exports is likely to fall 

Examiner Tip

You are examined on trade-offs and conflicts both MCQ and in longer essay questions. In your longer responses, make sure you explain all of the steps in the process e.g. if economic growth increases too quickly, there is likely to be demand-pull inflation, which raises the cost of living for the citizens, resulting in them feeling poorer, as the purchasing power of their wage has decreased

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    Steve Vorster

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