Conflicts & Trade-offs between the Macroeconomic Objectives Flashcards
How many conflicts and trade-offs are there between the Macroeconomic Objectives?
5
What are the conflicts & trade-offs between the Macroeconomic Objectives?
1) Low inflation & low unemployment
2) Economic growth & the Balance of Payments on Current Account
3) Low unemployment & sustainable environment
4) Economic growth & income redistribution
5) Low inflation & Equilibrium on Balance of Payments
What are the conflicts & trade-offs between low inflation & low unemployment?
Shortage of labour in specific field-> wage pressure ⬆️ as workers scarce & ✖️ many replacements-> ⬆️ spending in economy-> ⬆️ in demand & … inflation
- … ⬇️ unemployment/⬇️ spare capacity-> ⬆️ inflation (NOTE- when Keynesian LRAS curve vertical (at full capacity)- only price increases ✖️ real GDP)
What is the Phillips curve?
Philips curve- observation of trade-off (when factor only improves at expense of other) between 2 macroeconomic objectives: low unemployment and low inflation (both ✖️ be achieved simultaneously)
What does the Phillips curve show?
Y-axis- wage inflation
X-axis- unemployment
When unemployment ⬇️ (approaching full capacity), wages ⬆️ (wage inflation) because workers scarce and … workers only move from other work if incentivised by ⬆️er wages-> ⬆️ disposable income … demand ⬆️-> inflation
… shows that low unemployment and low inflation ✖️ be achieved together
When unemployment ⬆️, wages ⬇️ (low wage inflation) because workers in surplus … employers in power position-> ⬇️ disposable income … demand ⬇️-> low inflation … low inflation can ONLY be achieved when unemployment is ⬆️
Is the Phillips curve practical in real life?
BUT ✖️ practical as if the government spends ⬆️ to ⬇️ unemployment-> ⬆️ workers employed-> ⬆️ in wages (wage inflation- workers scarce)-> ⬆️ in AD & … inflation as ⬆️ disposable income due to wage inflation-> workers & firms realise wages & profits (profits ⬆️ in nominal sense as ⬆️ workforce-> ⬆️ production and … ⬆️ profits) being eroded by inflation (wages and profits seem to be higher in a nominal sense but real value lower due to inflation and eventually workers and firms and catch on) & … employment short term & workers ⬇️ likely to work (⬇️ wages) & firms ⬇️ likely to employ (may even lay off) due to ⬇️ profits
What are the conflicts & trade-offs between Economic growth & the Balance of Payments on Current Account?
Economy growth-> ⬆️ incomes (⬆️ disposable)-> consumers ⬆️ likely to demand imports-> firms ⬇️ exports as easier to find customers in domestic market-> ⬆️ outflow of 💵 than inflow & … worse current account balance
Are there any exceptions to the conflicts and trade-offs between Economic growth & the Balance of Payments on Current Account?
2 EXCEPTIONS:
1) Export-led growth- economy grows & balance improves
2) Growth caused by ⬆️ in AS- potentially due to ⬇️ production costs-> ⬆️ competitiveness with other nations- economy exports ⬆️ & imports ⬇️
What are the conflicts & trade-offs between low unemployment & sustainable environment?
⬆️ workers employed/⬇️ unemployment-> ⬆️ congestion on road 🚗 & … ⬆️ CO2 released ALSO due to ⬆️ offices (greater energy usage)
⬆️ workers employed/⬇️ unemployment-> ⬆️ incomes-> spending on holidays abroad 🌞✈️-> foreign travel (🚢,✈️, 🚂) involves CO2
What are ways in which low unemployment & sustainable environment can be achieved together?
BUT ⬆️ employment-> ⬆️ government taxation-> ⬆️ ‘green’ taxes-> spending to ⬇️ CO2 use e.g. road tax on ‘gas-guzzling’ 🚗,🚛,🏍 etc
- ALSO dependent on sector where employment has ⬆️- service sector ⬆️ remote (work from 🏠) BUT manufacturing sector requires travel 🚗
What are the conflicts & trade-offs between Economic growth & income redistribution?
economic growth-> top end incomes ⬆️ (bonuses etc)-> widening income inequality
- AND as ⬇️ skilled workers employed & shortage of workers begins-> ⬆️ immigration to provide same skills … wages of ⬇️ skilled workers ✖️ ⬆️
ALSO- same ⬆️ in wages for everyone-> ⬆️ income inequality in absolute terms (gap still same)
What are ways in which Economic growth & income redistribution can be achieved together?
BUT ppl on ⬆️ incomes may employ from ⬇️ income groups-> ⬆️ demand for ⬇️ skilled labour-> ⬆️ wages
What are the conflicts & trade-offs between Inflation & Equilibrium on Balance of Payments?
BUT to control inflation-> ⬆️ interest rates (tight policy)-> ⬆️ in exchange rate-> imports cheaper & exports expensive-> ⬆️ demand for imports ⬇️ for exports-> worse balance
What are ways in which Inflation & Equilibrium on Balance of Payments can be achieved together?
⬇️ inflation-> ⬇️ relative prices of 🚗-> exports ⬆️ attractive and imports ⬇️ attractive for foreign and domestic consumers-> better balance
