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

Revision Note

Author

Steve Vorster

Expertise

Economics & Business Subject Lead

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

Exam 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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