Macroeconomic Aims

Achieving one aim often makes another harder. The syllabus names three pairings in particular: full employment and stable prices, full employment and balance of payments stability, and economic growth and environmental sustainability. A typical 4-mark "conflicts" question rewards two clearly distinct conflicts, each explained.

Growth vs low inflation (demand-pull)

The most common conflict. When the government uses expansionary fiscal or monetary policy (cutting taxes, raising public spending, cutting interest rates) to lift growth, aggregate demand rises. If demand rises faster than the economy's productive capacity can match, the result is demand-pull inflation.

So pursuing growth in the short run typically pushes the inflation rate up.

Full employment vs stable prices

The mechanism: when unemployment is very low, firms compete for the small pool of available workers and bid wages up. Higher wages raise firms' costs, which they pass on as higher prices. Inflation rises.

So a government that pushes unemployment too low in the short run accepts a faster inflation rate as a side-effect. (Economists call this short-run relationship the Phillips curve; you are not required to name it at IGCSE.)

Full employment vs balance of payments stability

Pushing the economy towards full employment tends to worsen the current account, through two channels.

Incomes. Policies that move the economy towards full employment put more people into work and raise household disposable income. Imports are income-elastic in most countries, so as incomes rise, spending on imports grows faster than export earnings and the current-account deficit widens.

Costs and competitiveness. A tight labour market leaves firms competing for a small pool of workers, so workers are able to bid wages up. Higher wages raise firms' unit costs and therefore export prices, so exports lose competitiveness abroad while relatively cheaper foreign goods take sales at home. Export revenue falls, import spending rises, and the current account worsens again.

So the closer a government pushes the economy to full employment, the harder balance-of-payments stability becomes.

Growth vs balance of payments

When incomes rise, consumers buy more imported goods (cars, electronics, foreign holidays). Imports are income-elastic in most countries.

So as growth raises incomes, imports rise faster than exports, and the current account deficit widens. Pursuing growth in this sense worsens the BoP position.

Growth vs equitable distribution

Growth raises average incomes but does not always raise everyone's income equally. Returns on capital, high-skilled wages, and ownership of property often grow faster than low-skilled wages. The result can be rising inequality alongside rising GDP.

So pursuing growth without redistributive policies may worsen the income-distribution aim.

Growth vs environmental sustainability

Faster output usually means more production, more energy use and more transport, which raise pollution and carbon emissions and use up finite resources more quickly. Chasing rapid growth can therefore damage the environment, while strict environmental protection (pollution taxes, emissions limits) can raise firms' costs and slow growth in the short run.

So the growth aim and the sustainability aim often pull against each other: more output now can mean greater environmental cost later.

When the conflicts ease: supply-side policies

Not every policy creates conflict. Supply-side policies that raise the productive capacity of the economy (better education and training, infrastructure, R&D, deregulation) can lift growth without pushing inflation up, because they shift aggregate supply rather than aggregate demand. Long-run supply-side improvement is the cleanest way out of the growth-inflation trade-off. The same applies to the employment/balance-of-payments conflict: higher productivity holds unit costs down and improves export competitiveness, so employment can rise without the current account sliding into a widening deficit.