Macroeconomic Aims » Conflicts Between Macroeconomic Aims

Why do aims conflict?

Remember the six macroeconomic aims: economic growth, full employment, stable prices, balance of payments stability, redistribution of income and environmental sustainability. It would be wonderful if a government could hit every target at once. Sadly, the things a government does to reach one aim can push another aim further away.

Think of revising for two exams on the same morning. Every hour spent on one subject is an hour taken from the other. Governments face the same sort of problem with the economy.

Key terms:

• Conflict between aims: a situation where moving towards one macroeconomic aim moves the economy away from another.
• Prioritise: to decide which aim matters most right now and put it first.

The three conflicts you need to know

Conflict 1: full employment and stable prices

To get more people into work, a government may try to increase total spending in the economy. Follow the chain of cause and effect:

• Spending in the economy rises, so firms sell more.
• Firms hire more workers to make more goods, so unemployment falls.
• With so many people wanting to buy and fewer unemployed workers available, firms find it easier to raise prices and workers can ask for higher wages.
• Prices across the economy rise faster, so stable prices are harder to achieve.

The conflict also works the other way round. If a government wants to bring prices under control, it may reduce spending. Firms then sell less, cut output and may let workers go, so unemployment rises. The full explanation of how inflation is caused comes in a later lesson, Causes of Inflation.

Conflict 2: economic growth and environmental sustainability

• The government encourages growth, so firms produce more.
• More production uses up more raw materials, energy and land, and creates more waste.
• More factories, lorries and power stations can mean more pollution and fewer natural resources left for the future.
• Environmental sustainability becomes harder to achieve.

Again the conflict can run in reverse. A government that sets strict limits on pollution or taxes polluting firms makes production more costly. Some firms may produce less or close, which can slow down growth. Some growth can come from cleaner technology, but in the short run the tension is real.

Conflict 3: full employment and balance of payments stability

• More people are in work, so households have more income.
• Households spend more, and part of that extra spending goes on imports, which are goods and services bought from other countries.
• Money paid out to the rest of the world rises faster than money coming in from exports.
• The gap between payments in and payments out grows, so balance of payments stability becomes harder to achieve.

The causes of such gaps are covered in a later lesson, Current Account Deficits and Surpluses.

So what do governments do?

Because aims can conflict, a government cannot always achieve all of them at the same time. It has to prioritise. Which aim comes first depends on the problems the country faces and on what the government and its voters think matters most. A country with very high unemployment may put jobs first. A country with rapidly rising prices may put stable prices first. A government may also change its priorities over time as the economy changes. Remember opportunity cost: choosing to fix one problem means giving up some progress on another.

Exam-style question

The government of Ostravia wants to reduce unemployment. It decides to spend more money on new roads and factories. Some people in Ostravia fear that prices will rise and that the extra production will damage the countryside.

(a) Identify two macroeconomic aims. [2 marks]

(b) Explain one conflict that may occur between full employment and stable prices. [4 marks]

(c) Discuss whether the government of Ostravia should put economic growth ahead of environmental sustainability. [6 marks]