The Government Pursues Four Main Macroeconomic Objectives, and in the Short Run They Can Pull Against One Another

1. The four main objectives are economic growth, price stability (low and stable inflation), minimising unemployment and a stable balance of payments on the current account.
2. Governments may also pursue wider objectives, such as balancing the budget, achieving a more equitable distribution of income and protecting the environment.
3. Each objective is judged against a headline indicator, which the next topics examine in detail.

Each Objective Matters for Living Standards and Economic Stability

1. Economic growth, measured by rising real GDP and real GDP per capita, raises incomes and living standards over time.
2. Price stability protects the value of money and helps households and firms plan; the UK target is 2 per cent CPI inflation, set for the Bank of England.
3. Minimising unemployment means labour is used more fully, avoiding lost output and the hardship of joblessness.
4. A stable balance of payments on the current account means the country broadly pays its way with the rest of the world, avoiding large and persistent deficits.

The Objectives Can Conflict with Each Other, at Least in the Short Run

1. Growth against price stability: when the economy nears full capacity, faster growth creates demand-pull inflation.
   1. Where spare capacity exists, growth need not raise inflation.
2. Unemployment against price stability: as unemployment falls and the labour market tightens, wage and price pressures build, a short-run trade-off illustrated by the Phillips curve.
   1. With fewer unemployed workers to hire, firms must offer higher wages to attract and keep staff, and these higher labour costs are passed on as higher prices.
3. Growth against the balance of payments: faster growth pulls in imports through the marginal propensity to import, worsening the current account.
   1. Export-led growth is the exception.
4. Inflation against the balance of payments: higher domestic inflation erodes competitiveness and widens a current account deficit, while a weaker currency can feed import-price inflation, so the link runs both ways.
5. A balanced budget against growth: cutting a deficit through fiscal consolidation can slow growth and raise unemployment in the short run.

In the Long Run, Supply-side Improvements Can Ease the Trade-offs

1. The conflicts are sharpest in the short run, when productive capacity is broadly fixed.
2. Over the long run, raising productive capacity through supply-side policy can deliver growth with low inflation and a stronger external position at the same time.
3. Policy therefore manages the conflicts rather than removing them, and some short-run sacrifice is usually unavoidable.