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

This guide follows the Cambridge IGCSE Economics (0455) syllabus for examination in 2026. It covers sections 4.1 (the role of government) and 4.2 (the macroeconomic aims of government) from section 4, Government and the macroeconomy. There is no separate tier for this syllabus, so all of it is for you. All numbers in the worked examples are invented for illustration and describe no real country.

Start from the course page at Cambridge IGCSE Economics and tick off topics on the printable checklist. When you finish reading, test yourself with the revision notes, the practice questions and the free diagnostics. For paper technique, see the exam preparation guide.

What this unit covers

Syllabus	What you must be able to do
4.1.1 The role of government	Explain what governments do locally, nationally and internationally
4.2.1 Macroeconomic aims	Describe economic growth, full employment/low unemployment, stable prices/low inflation, balance of payments stability and redistribution of income; explain why governments choose them and the criteria they set for each
4.2.2 Conflicts between aims	Explain and discuss full employment versus stable prices, economic growth versus balance of payments stability, and full employment versus balance of payments stability

The detailed causes, consequences and policies for growth, unemployment and inflation come later in the syllabus (4.6 to 4.8, with the balance of payments in section 6). Here you need the aims, the reasons for them, the targets, and the clashes between them.

4.1.1 The role of government

A government is the body that makes and enforces rules for a society and spends and raises money on its behalf. The syllabus asks for its role at three levels.

Level	Typical roles	Example in words
Local	Provide services close to where people live; control local land use; collect local charges	A town council runs refuse collection, parks and local roads, and decides where new housing may be built
National	Make laws; provide defence, police and courts; tax and spend; provide or fund education and health; regulate firms and markets; pursue the macroeconomic aims	A national government taxes incomes and uses the money to fund schools and hospitals
International	Agree rules and share costs with other governments; negotiate trade; tackle cross-border problems; give or receive aid	Several governments sign an agreement to cut pollution that crosses their borders

Why governments act at all

Markets leave gaps. Some goods, such as street lighting, would be under-provided if left to private firms, because people cannot be excluded from using them. Some activities impose costs on third parties, such as pollution. Markets also leave some people with very low incomes and cannot guarantee stable prices or jobs. Government steps in to correct these.

Why three levels

Different problems have different scales.

Problem: litter on town streets      -> local government (the town council knows the problem)
Problem: national unemployment       -> national government (it controls tax and spending)
Problem: pollution shared by a river -> international action (no single country can fix it alone)

Worked chain of reasoning, “Explain why a river polluted by three countries needs international action”: the factory in Country X sells its product at a price that ignores the damage downstream; Countries Y and Z suffer the cost without being able to charge Country X; if only Y and Z tighten their own rules the pollution still arrives; so a joint agreement with shared limits and monitoring is the only way to cut it. Note the shape: cause, effect, why the lower level cannot solve it, what the higher level does.

4.2.1 The macroeconomic aims

Macroeconomic aims concern the whole economy rather than one market. There are five.

Aim	Meaning	Why governments choose it	Example criterion a government might set
Economic growth	A rise in the real output of the economy over time	Higher output can raise living standards and tax revenue, and creates jobs	Real GDP to grow by 3% to 4% a year
Full employment / low unemployment	Everyone willing and able to work can find a job	Unemployment wastes resources, lowers incomes and causes hardship	Unemployment rate no higher than 5%
Stable prices / low inflation	A low, steady rise in the general price level	Falling purchasing power, uncertainty and lost competitiveness are avoided	Inflation between 1% and 3% a year
Balance of payments stability	Over time, money coming into the economy roughly matches money going out	Persistent deficits must be financed by borrowing or selling assets and may weaken the currency	Current account balance within 2% of GDP, deficit or surplus
Redistribution of income	Reducing the gap between high and low incomes	Fairness and less poverty; social stability	Fewer people below a chosen poverty line

Worked example 1: economic growth (real versus nominal)

Country A’s nominal GDP rises from 2,000 to 2,184 (invented units). The price index rises from 100 to 105.

Nominal growth = (2,184 - 2,000) / 2,000 x 100 = 9.2%
Real GDP year 2 = 2,184 / 1.05 = 2,080
Real growth = (2,080 - 2,000) / 2,000 x 100 = 4.0%

The government’s criterion is 3% to 4%, so it has just met its aim. Using the nominal 9.2% would wrongly suggest it overshot, because most of that rise is higher prices. Growth is about real output.

Worked example 2: unemployment

Country A has 4,888,000 people in work and 312,000 looking for work.

Labour force = 4,888,000 + 312,000 = 5,200,000
Unemployment rate = 312,000 / 5,200,000 x 100 = 6.0%

The criterion is 5% or less, so the aim is not met. To reach 5%, unemployment would have to fall to 5% of 5,200,000 = 260,000, a fall of 52,000 people. “Full employment” never means zero unemployment, because some people are always between jobs.

Worked example 3: inflation

A typical basket of goods costs 250 in year 1 and 257.5 in year 2.

Inflation = (257.5 - 250) / 250 x 100 = 3.0%

This sits at the top of the 1% to 3% band, so the aim is just met. Stable prices does not mean no change: the aim is a low, predictable rise.

Worked example 4: balance of payments

Country A’s trade and income flows for a year (invented units):

Item	Receipts	Payments	Balance
Goods	90	104	-14
Services	40	28	+12
Net primary income			-6
Net secondary income			+2

Trade in goods and services = -14 + 12 = -2
Current account = -2 - 6 + 2 = -6
As a share of GDP (2,000) = -6 / 2,000 x 100 = -0.3%

A deficit of 0.3% of GDP is inside the 2% criterion. Stability does not mean zero: a small, temporary deficit or surplus is acceptable. Only a large deficit that persists is a worry, because the country must keep borrowing or selling assets to pay for it.

Worked example 5: redistribution through a progressive tax

Country A taxes income as follows: nothing on the first 12,000; 20% on income from 12,000 to 40,000; 40% on income above 40,000.

Person P earns 30,000: tax = (30,000 - 12,000) x 20% = 3,600; average rate = 12%; after tax 26,400
Person R earns 80,000: tax = (28,000 x 20%) + (40,000 x 40%) = 5,600 + 16,000 = 21,600; average rate = 27%; after tax 58,400

R earns 2.67 times P before tax (80,000 / 30,000) and 2.21 times after tax (58,400 / 26,400)

The gap narrows. The tax revenue can also fund benefits and services that help low earners, which narrows it further.

Reasons behind the choice of aims

Why does a government choose particular aims and criteria?

• Welfare. Each aim links to living standards: jobs and rising output raise incomes, stable prices protect what incomes can buy, and redistribution improves fairness.
• Current problems. A country with high unemployment may put jobs first. A country with a large persistent deficit may stress the balance of payments.
• Stage of development. A low-income economy may prioritise growth and poverty reduction; a rich one may focus on stability.
• Public opinion and politics. Voters care about jobs and prices, so governments rank aims accordingly.
• Measurability. Criteria are set as numbers so that progress can be checked and the government held to account. A target such as “inflation of 2%, give or take 1 point” shows whether the aim was achieved.

4.2.2 Conflicts between aims

Aims often cannot all be met together. Achieving one can make another harder. You need three conflicts.

Full employment versus stable prices

Government spends more or cuts taxes -> total demand rises -> firms hire more workers
-> unemployment falls -> competition for workers pushes wages up
-> firms raise prices (demand-pull and cost-push) -> inflation rises

Illustration (invented): Country A’s unemployment falls from 8% to 6% as demand rises, but inflation rises from 2% to 5%, outside the 1% to 3% band.

Discussion points:

• The conflict is strongest when the economy is near full capacity, because extra demand cannot be matched by extra output.
• It is weaker when there is spare capacity, because firms can raise output without raising prices.
• It does not arise if unemployment falls because supply improves, for example through better training.

Economic growth versus balance of payments stability

Income rises -> people buy more of everything, including imports
-> imports rise faster than exports -> current account moves towards deficit

Worked example. Country A’s GDP rises from 2,000 to 2,100 (a 5% rise). Imports are 20% of GDP. Exports stay at 380.

Imports before = 0.20 x 2,000 = 400;  balance = 380 - 400 = -20
Imports after  = 0.20 x 2,100 = 420;  balance = 380 - 420 = -40

Growth of 5% doubles the deficit from 20 to 40. Evaluation: if growth is led by exports, or if the imports are machinery that raises future output, the conflict is smaller. The conflict is also less serious if the starting position is a surplus.

Full employment versus balance of payments stability

Creating jobs through higher demand raises incomes and spending on imports, so imports rise. If higher demand also pushes up domestic prices, exports become dearer for foreigners and fall. Firms may also sell more at home and less abroad. All of this worsens the balance of payments. This conflict differs from the growth one because it begins from the jobs target. It is weaker if the new jobs are in export industries or in firms that replace imports.

Common errors

• Writing “the government wants everything” with no mention that the aims clash.
• Treating full employment as zero unemployment.
• Treating stable prices as no price change, or confusing a fall in the inflation rate with a fall in prices.
• Quoting nominal rather than real growth.
• Explaining a conflict with an assertion (“growth is bad for the balance of payments”) instead of a chain of cause and effect.
• Ending a discussion answer without a judgement. Say which effect matters more and why, for example because of spare capacity or how large the import share is.

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.