2.6.8 Conflicts and trade offs between objectives and policies

Question 1

Trade off

Answer 1

One macroeconomic objective is achieved at the expense of the performance of another macroeconomic objective.

Question 2

Conflicts and trade offs between objectives: Economic growth Vs. Protection of the environment

Answer 2

As the economy grows, more resources are used. As we use resources and produce goods, we produce pollution, noise which destroys habitats. Economic growth can be achieved without damaging the environment, but the growth is likely to have more costs and be slower.
E.g. China’s GDP annual growth rate from 1989 averaged 8.83% annually, until 2024. Yet, China remains the largest emitter of carbon dioxide in the world.

Question 3

Conflicts and trade offs between objectives: Economic growth Vs. balance of payments

Answer 3

As the economy grows, consumers become wealthier. This leads to increased demand for imported goods. This worsens the balance of payments creating a trade deficit.
E.g. China is India’s largest deficit partner. China is running a massive trade surplus, due to be the largest exporter.

Question 4

Conflicts and trade offs between objectives:Unemployment Vs. Inflation

Answer 4

When employment is high, workers have more ‘bargaining power’ over their wages, because the pool of labour is smaller, employers have less bargaining power. Firms pass on increases in wages to the consumer in increased prices - causing inflation.