Pursuing one aim can harm another, so governments must make trade-offs.
Full employment and stable prices: when spending rises to cut unemployment, firms hire more. But as the economy nears full capacity, workers and materials become scarce, so wages and prices rise. Lower unemployment can mean higher inflation.
Economic growth and environmental sustainability: faster growth usually means more factories, energy use and transport. That can raise pollution and carbon emissions and use up natural resources.
Full employment and balance of payments stability: when incomes rise with more jobs, people buy more goods, including imports. Imports rise faster than exports, so the current account moves towards deficit.
Because of these conflicts, governments rank their aims and use several policies at once.
- Employment vs prices
- Lower unemployment can push up inflation.
- Growth vs environment
- More output can mean more pollution.
- Employment vs BOP
- Higher incomes raise imports, worsening the current account.
Worked example: Explaining a conflict step by step
Show why lower unemployment may cause inflation.
- Government raises spending, so demand for goods and services rises.
- Firms hire more workers to meet the demand, so unemployment falls.
- As spare workers run out, firms compete for staff by raising wages, so costs rise.
- Firms pass on higher costs and face strong demand, so prices rise: inflation increases.
Watch out for this
All of a government's aims can always be achieved at the same time.
Some aims pull in opposite directions in the short run. The government must decide which matters most at the time.
Check your understanding
Why might faster economic growth conflict with environmental sustainability?
- More production can mean more pollution and faster use of natural resources.
- Growth always reduces pollution.
- Growth raises unemployment.