Pearson Edexcel IAL Economics: Macroeconomic objectives and conflicts (YEC11) – Revision Notes

Condensed recall for the final weeks. For full explanations and longer examples, use the study guide. These notes follow the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification, Issue 2, June 2018, sub-topic 2.3.6 items 1 and 2. The specification places this in Unit 2, an IAS compulsory unit that is also part of the full International Advanced Level (Units 3 and 4 are the extra IA2 content). All data below is invented, for Country S.

Links: Edexcel A Level Economics hub, printable checklist, practice questions, economic growth revision notes and 10-minute diagnostics.

1. The objectives (item 1, a to f)

Ref	Objective	Measure	Formula or note
1a	Economic growth	Real GDP growth	Real GDP = nominal GDP / deflator x 100
1b	Low, stable inflation	CPI	(new CPI - old CPI) / old CPI x 100
1c	Low unemployment	Unemployment rate	Unemployed / labour force x 100
1d	Current account equilibrium	Balance, % of GDP	Goods + services + primary income + secondary income
1e	Balanced budget	Deficit, % of GDP	Spending - revenue; debt is the stock of past deficits
1f	Greater income equality	Income shares, ratios	Top 20% share / bottom 20% share

Labour force = employed + unemployed. People not looking for work are outside it. Low = near the target. Stable = little variation from year to year. Equilibrium = a balance small enough to finance sustainably, not necessarily exact zero. Budget balance = revenue minus spending; a deficit adds to debt, a surplus can reduce it. Inflation target = the rate a government or central bank aims for; “low” means near it and “stable” means close to it year after year.

Worked reminders: Country S

Growth       Nominal GDP 840 -> 890.4 (+6.0%); deflator +4.0%
             Real growth = 1.060 / 1.040 - 1 = 1.9%
Inflation    CPI 131.0 -> 134.9: 3.9 / 131.0 = 3.0%
Unemployment 0.72m unemployed, 9.6m labour force: 7.5%
Current acct Goods 210 - 228 = -18; services +9; primary -6; secondary +2
             Balance = -13, which is -13 / 840 = -1.5% of GDP
Budget       Revenue 252, spending 266: deficit 14 = 1.7% of GDP
Equality     Top 20% hold 42% of income, bottom 20% hold 7%: ratio 6.0

2. The conflicts (item 2, a to d)

Use the chain: cause → mechanism → effect on the second objective → evaluation.

Ref	Pair	Core chain
2a	Inflation and unemployment	AD up → output up, unemployment down → wages and prices rise faster
2b	Growth and environment	Output up → resource use and emissions up → external costs, depletion
2c	Inflation and current account	Prices up relative to partners → exports fall, imports rise; growth also sucks in imports
2d	Growth and income equality	Gains go mainly to higher incomes → gap widens; redistribution may weaken incentives

2a. Short-run Phillips curve

• Axes: unemployment on the horizontal axis, inflation on the vertical axis.
• Shape: downward sloping, convex.
• Movement along the curve: caused by a change in aggregate demand.
• Shift outwards (worse): cost-push shock, higher expected inflation. Shift inwards (better): faster productivity growth.
• Stagflation: rising unemployment (falling output) together with rising inflation.

Worked reminder, using the straight-line model inflation = 9.5 - 1.5 x unemployment (a simplification of the curve):

Unemployment 3%: inflation = 9.5 - 4.5 = 5.0%
Unemployment 4%: inflation = 9.5 - 6.0 = 3.5%
Unemployment 6%: inflation = 9.5 - 9.0 = 0.5%
Each point off unemployment costs 1.5 points of inflation.
A cost-push shock adding 2 points at every rate: at 4%, inflation = 3.5 + 2.0 = 5.5%

Evaluate: the curve is short run; spare capacity flattens it; the cause of the shock matters; a convex shape means the last jobs are the most expensive in inflation.

2b. Growth and the environment

Output +4%, emissions per unit of output -2%:
emissions = 1.04 x 0.98 = 1.0192, a rise of 1.9%  (relative decoupling only)
Needed fall in intensity for no rise: 1 - 1/1.04 = 3.8%

Evaluate: GDP omits external costs; technology and carbon pricing narrow the conflict; richer countries may afford cleaner growth; some resource losses cannot be reversed.

2c. Inflation and the current account

Price channel: Country S prices +4.8%, partners +2.4%
Relative price = 1.048 / 1.024 - 1 = 2.3% dearer

Income channel: imports 228, income elasticity of demand for imports 2.0, income +3%
Import growth = 2.0 x 3% = 6%, so imports = 228 x 1.06 = 241.7
Goods balance (exports unchanged at 210) = 210 - 241.7 = -31.7, from -18

Evaluate: elasticities; exchange rate adjustment; whether the deficit is financed; whether inflation is domestic or imported.

2d. Growth and income equality

Bottom 20% mean income 7,000 grows 2% -> 7,140
Top 20% mean income 42,000 grows 4% -> 43,680
Ratio rises from 6.0 to 43,680 / 7,140 = 6.1
Gains: bottom 140 cu, top 1,680 cu

Evaluate: absolute against relative gains; who benefits from growth; tax design and incentives; very high inequality may reduce opportunity.

3. Method in steps: a conflict question

1. Name both objectives and say which way each moves (“unemployment falls but inflation rises”).
2. Start from the cause: a rise in aggregate demand, a cost shock, faster growth, a change in the price level relative to partners.
3. Chain the mechanism in short links: spare labour used up → wages up → prices up.
4. Add a figure from the data if the question gives one, and say what it shows.
5. Evaluate: size, time, cause, spare capacity, and what else could be done.
6. Judge: say which objective matters more in this case and why.

Evaluation prompts by conflict

Conflict	Prompts
2a	Is the economy near capacity? Demand-pull or cost-push? Has the curve shifted?
2b	Does growth rely on fossil fuels? Is there a carbon price? Is the damage reversible?
2c	How elastic is trade? Is the exchange rate fixed? Is the deficit financed by investment?
2d	Who gains from growth? Absolute or relative gain? How would redistribution affect incentives?

When objectives help each other

Growth tends to lower unemployment and raise tax revenue, so the budget improves. Lower unemployment also cuts benefit spending. A strong answer says whether the objectives move together or apart in the case given, and does not assume a conflict.

4. Must-know distinctions

Pair	Difference
Movement along the Phillips curve vs shift	Demand change vs supply shock or expectations
Real vs nominal	Real removes price changes
Relative vs absolute decoupling	Emissions rising more slowly vs not rising
Deficit vs debt	Annual flow vs accumulated stock
Absolute vs relative gain	Size of gain vs change in the gap
Unemployment rate vs number	Percentage of labour force vs count

5. Quick self-test

1. Nominal GDP rises from 600 to 636 while the deflator rises from 100 to 103. Calculate real growth to 1 decimal place.
2. A CPI goes from 118.0 to 121.5. Calculate inflation to 1 decimal place.
3. There are 0.9m unemployed and 13.1m employed. Calculate the unemployment rate.
4. Goods exports 150, goods imports 140, net services +12, net primary income -9, net secondary income -4. Calculate the current account balance.
5. A budget has revenue 500 and spending 540. GDP is 2,000. Calculate the deficit as a percentage of GDP.
6. Using inflation = 9.5 - 1.5 x unemployment, find inflation at 5% unemployment.
7. Output rises 3% and emissions per unit of output fall 3%. Calculate the change in total emissions to 1 decimal place.
8. Inflation over four years is 1.0%, 6.5%, -2.0% and 4.5%. Calculate the average and say whether inflation is stable.
9. Top 20% hold 45% of income and bottom 20% hold 9%. Calculate the ratio.
10. State why a cost-push shock moves the short-run Phillips curve rather than moving the economy along it.

Answers

1. 636/600 = 1.060; 1.060/1.03 - 1 = 2.9%.
2. (121.5 - 118.0)/118.0 = 3.0%.
3. Labour force 14.0m; 0.9/14.0 = 6.4%.
4. Goods +10; +10 + 12 - 9 - 4 = +9 (a surplus).
5. Deficit 40; 40/2,000 = 2.0%.
6. 9.5 - 7.5 = 2.0%.
7. 1.03 x 0.97 = 0.9991, so emissions change by -0.1% (absolute decoupling, just).
8. Average = 10.0/4 = 2.5%. It is not stable: the rate swings by several points and turns negative (deflation).
9. 45/9 = 5.0.
10. It changes the inflation rate at every level of unemployment, so the whole relationship moves.

Where marks are usually lost

• Quoting nominal growth when real growth is asked.
• Dividing unemployment by the population instead of the labour force.
• Labelling the Phillips axes the wrong way round.
• Describing “inflation and unemployment” without saying which way each moves.
• Treating a movement along the curve and a shift as the same thing.
• Giving a conflict as certain, without time, size or cause.
• Mixing up deficit (flow) and debt (stock).
• Ignoring that a gap can widen while everyone’s income rises.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification, Issue 2, June 2018 (first teaching September 2018), Pearson Education Limited; sub-topic 2.3.6, items 1 and 2.