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Conflicting and Complementary Economic Objectives

Economics (Year 12) - Economic Policy Objectives

Christian Bien

The five economic policy objectives of sustainable economic growth, price stability, full employment, equitable distribution of income and efficient allocation of resources are interrelated. Economic objectives can be:

  • Conflicting - to which achieving one economic objective results at a cost of the ability to meet another economic objective

  • Complementary - where achieving one economic objective will also assist in meeting another economic objective.

Governments need to consider the impending effects of targeting specific economic objectives and need to create an economic policy that best meets the ability of all economic objectives.

Sustainable Economic Growth

Complementary Objectives:

  • Full employment - expanding the economy requires the employment of more resources, including labour

  • Efficient allocation of resources - as the economy expands, resources become more scarce and are used more intensively and efficiently

Conflicting Objectives:

  • Price stability - expanding the economy will increase competition for resources, increasing the cost of resources to meet additional demand

  • Equitable distribution of income - while some may argue that achieving economic growth increases employment, thus reducing the unemployment gap, the gains from economic growth are likely to benefit specific groups at a cost of others. For example, the mining boom benefited the mining industry at the cost of importing competing industries that suffered from a higher dollar.

Price Stability

Complementary Objectives:

  • Sustainable economic growth - achieving price stability gives certainty and confidence to households and investors, increasing private spending and hence, economic growth

Conflicting Objectives:

  • Full employment - typically, during periods of full employment inflation is generally high. inflammatory policies are often used during periods of full employment and counteract demand-pull inflation with higher cash rates or lower fiscal spending. As a result of lower aggregate demand, higher unemployment can be expected.

Full Employment

Complementary Objectives:

  • Sustainable Economic Growth - employing more resources will allow more people to spend in the economy has a multiplier effect. Confidence will increase encourage further private spending.

  • Resource Allocation - As labour becomes more scarce, resource allocation becomes more efficient as labour seeks higher wages. In addition, other resources are also more efficient, higher wage growth leads to increases in capital deepening and investment in innovations to further expand productivity and resource efficiency.

Conflicting Objectives:

  • Price Stability - As employment increases, labour has more income and hence consume more resources, putting pressure on prices. Example: In January 2011, unemployment was at almost full employment at 5.1% (ABS - 6202.0) . This put increasing pressure on CPI at 3.3% (ABS - 6401.0) and wage growth at 4.0% (ABS - 6345.0), which were both greater than economic growth at 1% (ABS - 5206.0).

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