economics : theme 2 - government objectives

why is it rare for governments to be able to meet all its objectives at the same time?

• complexity of the economy and the limitations of economic polices make this difficult

• cannot control the economy, can only influence it

what is a trade-off

resolving one issue, but letting another one worsen

full employment and inflation example

• when unemployment falls to low levels, there is a risk that cost push inflation will pick up

• demand for labour is increasing and labour shortages in many industries and occupations may arise

• this puts upward pressure on pay as employers offer higher pay both to recruit and retain their key workers

when the majority of the economically active are working / earning what happens to aggregate demand

• would increase

• AD↑ = C↑ + I↑ + G + (X - M↑)

if employment rises there’s an increase in consumption which leads to what type of inflation

demand pull inflation

phillips curve

shows that inflation and unemployment have an inverse relationship

why has the Phillips curve been discredited

in recent years unemployment fell and so did inflation (between 1991 and 1997)

4 other trade off examples

• economic growth and income distribution / equality

• economic growth and the environment / sustainability

• high employment and balance of payments equilibrium

• high employment and equality of income

economic growth and income distribution / equality explanation

• more income distribution would mean more gov spending on welfare which could therefore limit economic growth

• if total income is increasing then GDP increases

• if businesses begin to do well then those at the top (owners, managers and shareholders) will earn more which leads to an increase in GDP / economic growth but gap between the rich and the poor would widen

economic growth and the environment / sustainability explanation

• if more land is being used (e.g. for farming) then this could lead to economic growth as resources are being used more effectively

high employment and balance of payments equilibrium

• more people in work means higher incomes

• so higher propensity to import

• so worsening balance of payments

high employment and equality of income

• high employment means more people in work and would most likely see their incomes rise

• would lead to a wider gap between those in work (economically active) and those not working (economically inactive)