What this lesson teaches
I can state the government's macroeconomic aims, explain why they are chosen, and show where they conflict.
Syllabus K343, 4.1.1. Macroeconomic aims: the macroeconomic aims of government: economic growth, full employment/low unemployment, stable prices/low inflation, balance of payments stability, redistribution of income, environmental sustainability; reasons behind the choice of aims and the criteria that governments may set for meeting each aim; possible conflicts between macroeconomic aims: full employment and stable prices, economic growth and environmental sustainability, full employment and balance of payments stability
Make a guess
The government boosts spending to cut unemployment when there are few spare workers left. What is the risk?
- No risk, because more jobs and stable prices go together.
- Unemployment rises, because firms cut jobs to save money.
- Prices rise faster, as firms compete for scarce workers.
Show the answer
Prices rise faster, as firms compete for scarce workers.
Near full employment, extra spending pushes up wages and prices. Lower unemployment can come at the cost of higher inflation.
Pursuing one aim can harm another, so governments must make trade-offs.
Full employment and stable prices: when spending rises to cut unemployment, firms hire more. But as the economy nears full capacity, workers and materials become scarce, so wages and prices rise. Lower unemployment can mean higher inflation.
Economic growth and environmental sustainability: faster growth usually means more factories, energy use and transport. That can raise pollution and carbon emissions and use up natural resources.
Full employment and balance of payments stability: when incomes rise with more jobs, people buy more goods, including imports. Imports rise faster than exports, so the current account moves towards deficit.
Because of these conflicts, governments rank their aims and use several policies at once.
- Employment vs prices
- Lower unemployment can push up inflation.
- Growth vs environment
- More output can mean more pollution.
- Employment vs BOP
- Higher incomes raise imports, worsening the current account.
Worked example: Explaining a conflict step by step
Show why lower unemployment may cause inflation.
- Government raises spending, so demand for goods and services rises.
- Firms hire more workers to meet the demand, so unemployment falls.
- As spare workers run out, firms compete for staff by raising wages, so costs rise.
- Firms pass on higher costs and face strong demand, so prices rise: inflation increases.
Watch out for this
All of a government's aims can always be achieved at the same time.
Some aims pull in opposite directions in the short run. The government must decide which matters most at the time.
Check your understanding
Why might faster economic growth conflict with environmental sustainability?
- More production can mean more pollution and faster use of natural resources.
- Growth brings cleaner technology, so pollution falls as output rises.
- Growth raises unemployment, as firms replace workers with machines.
Show the answer
More production can mean more pollution and faster use of natural resources.
Right. Output growth often raises emissions and resource use.
Check your understanding
A government cuts taxes and raises spending to reduce unemployment. Which other aim is most at risk?
- Low inflation
- A fairer income distribution
- Low unemployment
- Economic growth
Show the answer
Low inflation
Right. Higher total demand can push prices up as the economy nears full capacity.