Trade-offs

What is a trade-off

Potential conflict caused by macroeconomic objectives

What are some key macroeconomic objectives

• Price stability

• Growth of real GDP

• Falling unemployment/rising employment

• Higher average living standards

• External balance on the current account

• A more equal distribution of wealth and income

What are examples of possible trade offs

• Raising unemployment and increase in automation/technology

• Economic growth and inflation

• Economic growth and environmental sustainability

• Economic growth and decreasing inequality

• Economic growth and balance of payments

• Falling unemployment and increased competition

Explain the trade off between economic growth and inflation

As the economy grows this can cause increased aggregate demand causing the general price level to rise which = inflation

Explain the trade off between economic growth and the balance of payments

• When income rise rapidly, consumers may buy more imported goods worsening the trade balance

• High inflation from growth worsens the price competitiveness of industries

• Businesses will need to import more materials and equipment to expand production

What are measures to overcome trade offs

• Supply side policies

• Exchange rate depreciation

• Effective macro policies

How can supply-side policies help to overcome trade-offs and what are they for

• Reforms to improve labour productivity

• Incentives to promote R&D

• Measures to increase investment in export sectors

All to increase the capacity and allow firms to lower costs of production

How can exchange rate depreciation help to overcome trade-offs

Makes export prices more competitive and imports are more expensive. Effects are determined by elasticity of demand for exports and imports

How can effective macro policies help to overcome trade-offs

• Monetary policy to keep inflation low relative to other major countries

• Infrastructure investment