macroeconomic-objectives-conflicts-and-changes

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Conflicts in Achieving the Macroeconomic Objectives

As the UK government tries to implement one objective, in the short run it can affect its ability to achieve another objective

The Common Trade-offs that Exist Between the Macroeconomic Objectives

Conflict	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 & 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 a balanced budget	Economic growth driven by expansionary fiscal policy often requires a budget deficit
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

Examiner Tips and Tricks

The material on this page is frequently examined in the Paper 2 structured questions. You will be asked to discuss to what extent rapid economic growth might conflict with at least two other macroeconomic objectives.

Identify two other macroeconomic objectives that are in conflict with economic growth, such as low levels of inflation and environmental sustainability
Explain that if UK government tries to achieve one’s objective, it affects the ability to achieve another macroeconomic objective
Consider that low and stable rates of inflation may have been sacrificed in order to achieve economic growth. Additionally, economic growth contributes to environmental degradation and sustainable development.

Changes to the Macro Objectives over time

The priority of macroeconomic goals is determined by the current government
- When the government changes, the priority may change
- E.g. The current government may prioritise economic growth over inequality in income, whereas a future government may focus more on reducing unemployment
The priority of the macroeconomic goals may also change over time due to societal changes
- E.g. In the 1950s and 1960’s, many post-war governments focused on improving and delivering public services. However, the current focus is more on cutting public services so as to reduce tax rates in the country

Changing Macroeconomic Objectives over time

Time Period	Explanation of the Macroeconomic Focus
1940’s to 1970’s	Keynesian economics dominated this time period Importance was placed on achieving economic growth and full employment
1980’s	The focus shifted to more free market economics (less government intervention) During this time period, the UK suffered from high levels of inflation
1990s	Controlling inflation continued to be an important objective in the UK
2008–2012	This was a period of economic recession Economic growth and employment required policies to stimulate demand

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macroeconomic-objectives-conflicts-and-changes

Conflicts in Achieving the Macroeconomic Objectives

Examiner Tips and Tricks

Changes to the Macro Objectives over time

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