Conflicts between economic objectives

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Economics is all about choices, it’s about scarce resources and unlimited wants. You can’t have everything you want, and governments can’t achieve all of their economic objectives at the same time.

In the context of the NSW Higher School Certificate (HSC) Economics course, there are six economic objectives that are examined:

  • Economic growth

  • Price stability (inflation)

  • Full employment (unemployment)

  • External stability

  • Income and wealth distribution

  • Environmental sustainability

Let’s consider three key conflicts in terms of economic objectives.

Conflict one: Economic growth and environmental sustainability

In our economic system, countries mainly use non-renewable resources to fuel their economic growth. They also have a habit of clearing away forests and animal habitats to make way for development. And, in the process of achieving growth, a negative externality (an unintended consequence of production) is pollution.

The more rapidly countries pursue economic growth, the more rapidly they deteriorate the environment. You can think of it as a trade-off. By this logic, lower growth would preserve the environment...but this may also reduce material living standards.

Conflict two: Price stability and full employment

This is a classic economic conflict. In fact, it’s so famous that there’s a graph to describe this precise conflict. The graph is called the Phillips Curve and it looks like this:

Source: Lumen Learning

Source: Lumen Learning

The Phillips Curve shows that, in the short term, as inflation rises, unemployment will fall. This makes sense as higher inflation is generally a sign of stronger economic activity, including greater consumption and investment (part of aggregate demand), which will lead to greater demand from consumers for goods and services and therefore greater demand from firms for labour (known as derived demand). 

Likewise, when we reduce inflation, we slow aggregate demand (by slowing consumption and investment) thereby reducing firms’ demand for labour and increasing unemployment. 

In the long-term, this trade-off may not exist. But I’ll leave that to your uni lecturers to explain.

Conflict 2a: Economic growth and inflation

This is very much an extension of the points in conflict 2. Put simply, the higher the economic growth rate, the higher the inflation rate is likely to be.

Conflict 3: Economic growth and external stability

This is one of my favourite conflicts, maybe because it’s a bit trickier. Think about it this way: if economic growth is strong, then consumers have higher incomes. They would spend part of this extra money on goods and services, including imports. 

If demand for imports increases, this would likely negatively affect the Balance on Goods and Services in the Current Account of the Balance of Payments (recall that BoGS is equivalent to net exports, or X-M. And in this scenario, the volume of imports are increasing). As a result, the CAD could increase and worsen Australia’s external stability.

To reduce the CAD, and improve Australia’s external stability, a government may need to reduce the demand for imports by slowing the rate of economic growth. This is known as the balance of payments constraint. Hence, higher growth could conflict with external stability.

Yes, there are more conflicts. These are just a few of the more common ones you could refer to.