Cambridge IGCSE Economics: The role of government and macroeconomic aims (0455) – Revision Notes

These notes condense sections 4.1 and 4.2 of the Cambridge IGCSE Economics (0455) syllabus for examination in 2026: the role of government, the macroeconomic aims, and the conflicts between them. Full explanations and longer examples are in the study guide. Then try the practice questions, the free diagnostics, the course page and the printable checklist. All figures below are invented and describe no real country.

4.1.1 The role of government

Level	What it does	Quick example
Local	Services close to home; local planning; local charges	A council runs waste collection and decides where homes may be built
National	Laws, defence, police, courts; taxing and spending; education and health; regulating markets; macroeconomic aims	A national government funds schools from tax revenue
International	Agreements and shared rules; trade deals; cross-border problems; aid	Governments agree limits on a shared polluted river

Why government is needed, in one line each:

• Public goods would be under-provided by private firms.
• Spillover costs such as pollution are ignored by the market.
• Markets alone leave some people in poverty.
• Markets alone do not guarantee jobs or steady prices.

Match the level to the scale of the problem. If one council can solve it, it is local. If it needs a national budget or law, it is national. If it crosses a border, it is international.

4.2.1 The five aims at a glance

Aim	One-line meaning	Why chosen	Possible criterion
Economic growth	Rise in real output over time	Raises living standards, jobs and tax revenue	Real GDP up 3% to 4% a year
Full employment	Everyone willing and able to work has a job	Avoids wasted resources and hardship	Unemployment rate at or below 5%
Stable prices	Low, steady inflation	Protects purchasing power; certainty for firms	Inflation between 1% and 3%
Balance of payments stability	Receipts and payments roughly match over time	Avoids heavy borrowing and currency pressure	Current account within 2% of GDP
Redistribution of income	Narrower gap between rich and poor	Fairness; less poverty; social stability	Fewer people below a poverty line

Formulas to know

Measure	Working
Economic growth (real)	(real GDP this year - real GDP last year) / real GDP last year x 100
Real GDP	nominal GDP / price index x 100
Unemployment rate	(unemployed / labour force) x 100; labour force is employed plus unemployed
Inflation rate	(price index now - price index before) / price index before x 100
Current account	trade in goods + trade in services + net primary income + net secondary income
Average tax rate	tax paid / income x 100

Worked reminders

Growth. Nominal GDP rises from 800 to 852.8 while the price index goes from 100 to 104.

Real GDP = 852.8 / 1.04 = 820
Real growth = (820 - 800) / 800 x 100 = 2.5%

Unemployment. 144,000 people are unemployed in a labour force of 3,200,000.

Rate = 144,000 / 3,200,000 x 100 = 4.5%
To reach 4%: 0.04 x 3,200,000 = 128,000, so 16,000 fewer unemployed

Inflation. The price index moves from 140 to 147.

Inflation = (147 - 140) / 140 x 100 = 5.0%

Balance of payments. Exports of goods and services 560, imports 590, GDP 1,500.

Balance = 560 - 590 = -30  (deficit)
As a share of GDP = -30 / 1,500 x 100 = -2.0%

Choosing aims and criteria

Governments pick and rank aims by:

• the country’s current problem (high unemployment, large deficit, high poverty)
• its stage of development
• public opinion and politics
• resources available
• whether a numerical target can be measured and checked

A criterion is a measurable target or range. A band (such as 1% to 3%) tells everyone what counts as success.

4.2.2 Conflicts between aims

Method in steps for any conflict answer:

1. Name the two aims.
2. State the policy or change that helps the first (for example, higher government spending).
3. Trace the chain of effects, step by step, to the second aim.
4. Say what happens to the second aim (worse or harder to achieve).
5. Evaluate: when is the conflict large or small, and which aim matters more here?

Full employment versus stable prices

Total demand up -> firms hire -> unemployment down
-> labour scarcer, wages up -> costs and prices up -> inflation up

Strong when the economy is near capacity. Weak when there is spare capacity. Absent if unemployment falls through better skills (a supply-side gain).

Economic growth versus balance of payments stability

Incomes rise -> spending on imports rises -> imports grow faster than exports -> deficit

Example. GDP rises from 1,600 to 1,664, a 4% rise. Imports are 25% of GDP and exports stay constant.

Imports before = 0.25 x 1,600 = 400
Imports after  = 0.25 x 1,664 = 416
Imports are 16 higher, so the balance worsens by 16

Weaker if growth is export-led, or if the imports are machinery that raises future output.

Full employment versus balance of payments stability

Jobs created through demand -> incomes up -> imports up
Higher demand -> higher prices -> exports dearer abroad -> exports down
Firms switch output from exports to the home market

Weaker if the new jobs are in export industries or in firms that replace imports.

Must-know distinctions

Pair	Difference
Nominal and real GDP	Nominal uses current prices; real removes the effect of price changes
Inflation and a high price level	Inflation is the rate of rise in prices; falling inflation still means prices are rising, just more slowly
Full employment and zero unemployment	Full employment accepts some people between jobs
Balance of payments stability and a perfect balance	Small, temporary deficits or surpluses are fine; persistent large ones are the problem
Aim and criterion	An aim is a goal; a criterion is the measurable target
Local, national, international government	Differ by the scale of problem and the powers each has

Aims can also support each other. Growth can create jobs and raise the tax revenue that pays for redistribution. A good answer notes this before or after explaining the clash.

Two checks before you write a conflict answer. First, say which aim the government is pursuing and which one suffers; the direction matters. Second, decide how large the clash is in the case given. The same policy that causes a sharp conflict in a busy economy may cause almost none when many workers are idle, so tie your judgement to the country described.

Quick self-test

1. Name the three levels at which the syllabus asks you to consider the role of government.
2. Give one reason why a government might choose low unemployment as an aim.
3. Calculate the unemployment rate if 90,000 people are unemployed and 1,410,000 are employed.
4. Calculate the inflation rate if the price index rises from 125 to 130.
5. Real GDP was 400 last year and 410 this year. Calculate real growth.
6. A country’s exports of goods and services are 310 and imports are 295. State the balance and whether it is a surplus or a deficit.
7. State why growth can worsen the balance of payments.
8. Explain why zero unemployment is not the aim of full employment.
9. A person pays 3,000 tax on an income of 20,000. Calculate the average tax rate.
10. Name the conflict in which rising demand pushes up wages and prices.

Answers

1. Local, national and international.
2. Unemployment wastes resources, lowers incomes and causes hardship, so the government wants jobs for those willing to work.
3. Labour force = 90,000 + 1,410,000 = 1,500,000. Rate = 90,000 / 1,500,000 x 100 = 6.0%.
4. (130 - 125) / 125 x 100 = 4.0%.
5. (410 - 400) / 400 x 100 = 2.5%.
6. 310 - 295 = +15, a surplus.
7. Higher incomes raise spending on imports, so imports may rise faster than exports.
8. Some people are always between jobs, so full employment allows a small amount of unemployment.
9. 3,000 / 20,000 x 100 = 15%.
10. Full employment versus stable prices.

Where marks are usually lost

• Giving only a list of aims with no reason for choosing them.
• Calling a target “the aim” and forgetting that the criterion is a number or range.
• Using nominal figures when asked for real growth.
• Calculating the unemployment rate from the employed population instead of the labour force.
• Describing a conflict in one sentence without the chain of effects.
• Describing only the conflict and never saying when it is small.
• Leaving out a final judgement on a discuss question.
• Writing a percentage point change as a percentage change (a rise from 2% to 5% is 3 percentage points).
• Confusing local, national and international roles by giving a national example for a local one.

Official syllabus

This page is aligned to the Cambridge IGCSE Economics 0455 syllabus for examination in 2026 (version 2), published by Cambridge University Press & Assessment (Cambridge International), sections 4.1.1, 4.2.1 and 4.2.2.