Conflicts between

macroeconomic objectives
2.6.4
Define trade-off

This is a situation in economics whereby sacrificing variables

illustrating the concept of opportunity cost. For example in order to
have high economic growth this can have a conflict with low inflation.
Main macroeconomic conflicts
1. Low inflation conflicts with high economic growth
2. Low unemployment conflicts with low inflation
3. Low unemployment can conflict with a positive Balance of
payments
4. High economic growth can conflict with sustainability of the
environment
Low inflation conflicts with high economic growth
(LCOR)
WHY? WHY?
Demand pull
Cost push
• High economic growth increases the demand for labour
• High economic growth increases the demand for labour
• This enables workers to have a higher disposable income
• Higher wages increase the cost of production
• Higher disposable income can increase consumption
• SRAS shifts left
• Therefore firms may react by increasing prices
• Firms pass this increase in costs to consumers in the form
of higher prices.
Low unemployment conflicts with low
inflation
WHY?

• Low unemployment increases disposable incomes

• This disposable income can create more consumption
• AD can increase demand-pull inflation
• Also higher employment increases wages which can increase the cost of production for a firm as firms offer
higher wages in order to attract and retain the next best workers, therefore the firm may increase prices
increasing cost-push inflation
Low unemployment can conflict with a positive Balance of
payments

• Why?

• Lower unemployment can increase disposable incomes, this income

can increase the marginal propensity to import from abroad.
• Lower unemployment can increase inflation, which can decrease
international competitiveness in the UK, decreasing exports.
High economic growth can conflict with sustainability of the
environment

• WHY?

• Higher growth can create pollution and congestion, these negative

externalities which can harm the environment.
• Also higher growth rates increase the depletion of natural scarce
resources which can create unsustainable growth rates