2 . While the overall aim may be to improve the economy, governments find that their
macroeconomic policies sometimes conflict with each other. Explain why some government
economic policies may conflict with each other and discuss which should be given priority.
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Government objectives in an economy is economic growth , price stability . full employment ,
balance of payment , Sub objective less extenality , less environmental damage , equal distribution of
income, efficiency / equity .
Government objectives are always important.For full employment,government don’t need to
spend very much because the welfare benefit and unemployment benefit is very high,at the same
time,government can collect tax revenue from employed people,so has less possibility to become
budget deficit.For price stability,government is responsible to control the inflation,because for some
hyperinflation ,the country’s international competitiveness will be reduced.Less export revenue and
more import expenditure,the economy will experience Current Account deficit if its within Marshall
Learner condition(PED net export>1).For economic growth,government aim to move from developing
country towards developed country and increase living standard by achieving economic
growth.Although its not the only way to increase the living standard,boost the GDP and increase the
real output is the most effective and direct way.Firms can earn a lot of profit and government can
collect fiscal dividend.
Government hope to achieve all the objectives,however,There is trade -off.If the country achieve
economic growth by actual growth(AD outward shift),there will be an increase in real GDP as well as
price level so there will be inflation.
According to Philips curve：a curve that shows the relationship between inflation rate and
unemployment rate over a period of time.,as economic growth from AD1 to AD2,the unemployment
rate decrease so inflation rate increase.But , when AD shift approaching FULL employment,price
level very high , economic growth increase very slow.In addition,of there is unused FOP,the
government always use fiscal or monetary expansionary policy to boost AD,but the increase in
inflation rate and decrease in unemployment rate conflict.
Firstly,if thee country is keep producing towards full employment,there will be negative
externality on production.For example:the noise produced by factory, negatively affect the living
people nearby who are not involved in either production or consumption process.So the aim
economic growth is conflict with the negative externality.
Secondly,we can introduce the Lorenz curve and Kuznets curve to explain the income
inequality.In Lorenz curve,GINI coefficient=area A/(area B+area A).The blue 45 degree line represent
perfect income equality,as the GINI coefficient become large,area A larger,income are distributed
more inequality.In Kuznets curve,as GDP per head increase,GINI coefficient gets larger and then
smaller,it means the increasing gradient trend is when developing country in increase GDP per head
the income inequality in become more and more serious,which conflict with government objective.
Lastly,the formation of monopoly is also conflict with the government objectives.Because in
monopoly.They produce at MR=MC instead of P=MC,so the allocative efficiency is not be
reached.Also,the monopoly capture the consumer surplus into abnormal profit,and producing less
than optimum quantity.So the monopoly conflict with the good allocation of the resources.
However,in some developed countries,even though they increase the GDP per head,they
wouldn’t experience greater GINI coefficient,because their government has enough of budget to give
welfare and benefit to different classes of people.And also,the existence of natural monopoly is
compulsory for all the countries whatever its whether conflict with government objectives or not.
In conclusion , all the aim government wants, but must be conflict. So government consider the
trade-off, current situation , budget. Prioritize certain , try to balance other aim.