Government macroeconomic objectives: economic growth, low inflation, low unemployment and a satisfactory balance of payments, and the conflicts between them.

What this dot point is asking

WJEC wants you to identify the government's main macroeconomic objectives, explain how each is measured, and analyse the conflicts and trade-offs between them.

The answer

The four main objectives

Economic growth is measured by the annual percentage change in real GDP (output adjusted for inflation); sustainable growth raises living standards over time. Inflation is the sustained rise in the general price level, measured in the UK by the Consumer Prices Index (CPI), with a government target of 2 per cent; both high inflation and deflation are harmful. Unemployment is measured by the Labour Force Survey rate (the internationally comparable measure) and the claimant count; the aim is a high level of employment. The balance of payments records transactions with the rest of the world, and the objective is to avoid a large, persistent current account deficit. Governments may add further goals: sound public finances, a fairer income distribution and environmental protection.

How the objectives are measured

Each measure has limitations the exam expects you to recognise. GDP ignores the distribution of income, unpaid work, the hidden economy and environmental costs. The CPI may not match an individual's spending pattern and can mismeasure quality change. The Labour Force Survey may understate hidden unemployment and underemployment. Knowing what each indicator does and does not capture is the basis for the evaluation marks in this unit and the next.

Conflicts between the objectives

The main conflicts are: growth versus inflation (boosting aggregate demand to raise growth near full capacity pushes the price level up); unemployment versus inflation (the short-run Phillips Curve says lower unemployment tends to come with higher inflation); and growth versus the balance of payments (higher incomes raise demand for imports, worsening the current account). Further tensions are growth versus the environment (output growth can raise emissions and resource use) and growth versus equity (the gains from growth may be unevenly shared). The escape route from several of these is supply-side improvement: raising potential output (shifting LRAS right) can deliver growth without inflation and improve competitiveness, easing the trade-offs, which is why supply-side policy is so prized.

Examples in context

Example 1. The UK 2 per cent inflation target. The UK's symmetric CPI inflation target of 2 per cent, pursued by the independent Bank of England, embodies the price-stability objective. It is symmetric because both overshooting (high inflation) and undershooting (deflation risk) are harmful. The target frames the central bank's interest-rate decisions and illustrates how a clear, measurable objective anchors macroeconomic policy and expectations.

Example 2. Growth, imports and the UK current account. The UK has run persistent current account deficits, partly because periods of strong, consumption-led growth suck in imports faster than exports rise. This is the growth versus balance of payments conflict in practice: demand-led growth tends to worsen the external position. It explains why policymakers stress raising competitiveness and exports through supply-side measures rather than relying on demand alone.

Try this

Q1. Name the four main macroeconomic objectives. [2 marks]

• Cue. Economic growth, low and stable inflation, low unemployment, and a satisfactory balance of payments.

Q2. Explain why pursuing faster economic growth might conflict with the inflation objective. [3 marks]

• Cue. Growth driven by rising aggregate demand near full capacity raises the price level, so faster demand-led growth tends to increase inflation, threatening price stability.