Conflicts Between Policy Objectives

Readers Question: Please could you explain and evaluate what the main conflicts between policy objectives are and why?

Economic Growth vs Inflation

The main conflict of policy objective is between economic growth / unemployment and inflation. When the economy expands it is more likely that inflationary pressures will increase. Inflation is particularly likely to occur when growth is above the long run trend rate and AD increases faster than AS.

At the moment, the UK has a conflict between inflation and growth. Economic growth is slowing down because of problems in the housing market. However, the Bank of England finds it difficult to cut rates because the economy is also experiencing cost push inflation.

Similarly there is also a conflict between inflation and unemployment, shown by the Phillips curve

Economic Growth vs Balance of Payments

When economic growth is led by consumer spending it tends to cause a deficit in the current account. This is because as consumer spending rises there will be a rise in import spending.

Economic Growth vs Environment.

There is a strong conflict between economic growth and environmental objectives. Higher GDP leads to higher levels of pollution and consumption of non renewable resources.

Note: These conflicts don’t always occur. It is possible to have low inflationary growth. If AS increases at same rate as AD, then inflation will remain low. If growth is export led it will not lead to a current account deficit.