Pearson Edexcel International Advanced Level Economics: Macroeconomic objectives and conflicts (YEC11)

This guide follows the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (YEC11), Issue 2, June 2018. It covers sub-topic 2.3.6, items 1 and 2: the macroeconomic objectives (a to f) and the possible conflicts between them (a to d). The specification labels Units 1 and 2 as the International AS (IAS) content and Units 3 and 4 as the extra International A2 (IA2) content. This material sits in Unit 2, an IAS compulsory unit, and is also part of the full International Advanced Level. Supply-side and demand-side policies (items 3 and 4 of 2.3.6) are taught elsewhere. Every country and number below is invented for illustration.

Related pages: the Edexcel A Level Economics hub, the printable checklist, the revision notes, the practice questions, the economic growth guide, the exam preparation page and the 10-minute diagnostics.

What you must be able to do

Ref	Statement	You should be able to
1a	Economic growth	Measure it, explain why governments want it
1b	Low and stable inflation	Calculate it, explain “low” and “stable”
1c	Low unemployment	Calculate the rate, explain why it matters
1d	Current account equilibrium	Calculate the balance, explain why large persistent gaps worry
1e	Balanced budget	Calculate deficit and debt ratios
1f	Greater income equality	Compare income shares
2a	Inflation against unemployment	Use the short-run Phillips curve
2b	Growth against the environment	Chain the effects, evaluate
2c	Inflation against the current account	Chain the effects, evaluate
2d	Growth against income equality	Chain the effects, evaluate

1. The six objectives

Objective	Usual measure	Why a government wants it
Growth	Annual % change in real GDP	More output, jobs and tax revenue; higher living standards
Low, stable inflation	Annual % change in a consumer price index	Protects purchasing power; lets firms plan
Low unemployment	Unemployed as % of labour force	Output is wasted; incomes and tax revenue fall
Current account equilibrium	Balance as % of GDP	Avoids reliance on borrowing or selling assets abroad
Balanced budget	Deficit as % of GDP; debt as % of GDP	Limits debt and interest payments
Greater income equality	Share of income held by top and bottom groups	Fairness; wider access to opportunity

Worked example 1: measuring Country R in an illustrative year.

Growth       Nominal GDP 2,000 -> 2,170 (billion cu); deflator 100 -> 105
             Real GDP = 2,170 / 1.05 = 2,066.7
             Real growth = 2,066.7 / 2,000 - 1 = 3.3%  (nominal 8.5% overstates it)
Inflation    CPI 121.0 -> 124.3: (124.3 - 121.0) / 121.0 x 100 = 2.7%
Unemployment Employed 22.7m + unemployed 1.3m = labour force 24.0m
             Rate = 1.3 / 24.0 = 5.4%
             Next year: employed 23.2m, unemployed 1.05m, rate = 1.05 / 24.25 = 4.3%
Current acct Goods: 640 - 692 = -52; services +41; primary income -15; secondary -8
             Balance = -34, which is -34 / 2,170 = -1.6% of GDP
Budget       Revenue 780, spending 833: deficit 53 = 2.4% of GDP
             Debt 1,090 (50.2% of GDP) + 53 = 1,143 (52.7%, GDP held at 2,170)
Equality     Bottom 20% hold 6% of income, top 20% hold 48%: ratio 8.0

Low and stable. “Low” means a rate near a target (assume Country R targets 2% with one point either side). “Stable” is about the path. Two economies can both average 2.5% over four years: one runs 2.1, 2.6, 2.4, 2.9; the other runs 1.0, 6.5, -2.0, 4.5. The second is unstable, firms cannot set prices or wages with confidence, and a negative figure means falling prices.

Equilibrium, not zero. A small deficit financed by steady investment inflows may be sustainable. A large, persistent deficit means the country relies on borrowing or selling assets. A balanced budget likewise does not mean exactly zero in every year.

2. How to analyse a conflict

Use a chain: cause (what raises one objective) → mechanism (how it hits the other) → effect (direction and rough size) → evaluation (is the conflict certain, large, lasting?). Evaluation points that apply to all four conflicts:

• Cause of the problem. Demand-pull and cost-push inflation have different links to unemployment.
• Size. A 0.2 point rise in inflation is not a crisis.
• Time. Many conflicts are short run; supply-side change can ease them.
• Spare capacity. Near full capacity, conflicts sharpen; with spare capacity, objectives often move together.
• Policy choice. Governments can tolerate one outcome deliberately.

3. Inflation and unemployment: the short-run Phillips curve (2a)

The short-run Phillips curve plots unemployment (horizontal axis) against inflation (vertical axis). It slopes down and is convex (steeper at low unemployment).

Chain. Higher aggregate demand moves the economy up the short-run aggregate supply curve → firms raise output and hire → unemployment falls → workers are scarcer, so wages rise faster and firms with strong demand raise prices → inflation rises. Falling unemployment is bought with higher inflation.

Worked example 2. Illustrative data for Country R:

Unemployment (%)	4	5	6	8
Inflation (%)	6.0	4.0	3.0	2.0

inflation %
6 |  *
5 |
4 |     *
3 |        *
2 |              *
  +--4--5--6--7--8--  unemployment %

• From 5% to 4% unemployment: inflation rises 6.0 - 4.0 = 2.0 points, a cost of 2.0 per point.
• From 6% to 5%: 1.0 point per point of unemployment.
• From 8% to 6%: 1.0 point over 2 points, so 0.5 per point.
• Aim for 3% inflation: unemployment of about 6%. Aim for 4% unemployment: inflation of 6.0%. The government cannot hit both targets.

Why convex? At low unemployment, firms compete for scarce workers, so wage and price pressure builds fast. At high unemployment, extra slack does little to wage growth.

Shifts of the curve. A cost-push shock (for example a rise in imported fuel prices) shifts the curve outwards: if inflation is 1.5 points higher at every rate, 5% unemployment now comes with 4.0 + 1.5 = 5.5% inflation. Falling output and rising prices together is stagflation. Higher expected inflation also shifts it outwards. Faster productivity growth shifts it inwards.

Evaluation. The word “short-run” matters: the trade-off need not hold if the curve shifts or expectations change. Where spare capacity is large, extra demand may raise output with little inflation, so the curve is flat. The curve fits demand-pull better than cost-push. Data points from different years may lie on different curves.

4. Economic growth and the environment (2b)

Chain. Higher output → more energy, raw materials and land used → more emissions, waste and depletion of non-renewable resources → external costs fall on third parties and future generations. GDP counts the output but not the damage, so measured growth can overstate improvement in wellbeing.

Worked example 3: relative and absolute decoupling. Real output index rises 3% (100 to 103). Emissions per unit of output fall 1.5%.

Emissions index = 100 x 1.03 x 0.985 = 101.455, a rise of 1.5%
To keep emissions from rising, intensity must fall by 1 - 1/1.03 = 2.9%

Emissions grew more slowly than output (relative decoupling) but still rose. Absolute decoupling needs the intensity fall to be at least 2.9% here (1 - 1/1.03), slightly below the 3% growth rate.

Evaluation. Growth can fund cleaner technology and conservation; poorer countries may weigh growth more heavily than richer ones; a carbon price or regulation can narrow the conflict; the conflict is sharper when growth relies on fossil fuels, and long run costs may fall on others.

5. Inflation and the current account (2c)

Chain 1 (relative prices). Domestic inflation above trading partners’ → exports dearer abroad, imports cheaper relative to home goods → exports fall, imports rise → current account worsens, if the exchange rate does not adjust. Chain 2 (income). Growth that causes inflation also raises spending on imports.

Worked example 4. Country R’s prices rise 6.5% against 3.0% for partners, with a fixed exchange rate. Exports are 640 and imports 692 (goods). The price elasticity of demand for exports is 1.6 and for imports 1.2. Treat percentage changes as changes in value, a simplification.

Relative price rise = 1.065 / 1.03 - 1 = 3.4%
Exports fall   1.6 x 3.4% = 5.4%:  640 x (1 - 0.0544) = 605.2
Imports rise   1.2 x 3.4% = 4.1%:  692 x (1 + 0.0408) = 720.2
Goods balance = 605.2 - 720.2 = -115.0 (from -52.0), a worsening of 63.0

Evaluation. Elasticities decide the size: with inelastic demand the change is small. A floating exchange rate that depreciates can restore competitiveness. Inflation caused by imported costs hurts differently from domestic demand-pull. Partners’ inflation matters, and deficits can be financed by capital inflows.

6. Economic growth and income equality (2d)

Chain. Growth driven by high-skill or capital-owning groups raises their incomes faster → top share rises → inequality widens, although every group may still gain. Redistribution through higher marginal tax rates may weaken incentives and slow growth.

Worked example 5. Country R’s mean income per person is 10,000 cu. Income shares by fifth: 6, 10, 14, 22, 48 (sum 100). Incomes grow 1%, 2%, 3%, 3.5% and 5%.

Starting incomes: 3,000  5,000  7,000  11,000  24,000
New incomes:      3,030  5,100  7,210  11,385  25,200
Mean income rises from 10,000 to 10,385 (3.85%)
Top / bottom ratio rises from 8.0 to 25,200 / 3,030 = 8.3
Gain for bottom fifth 30 cu; top fifth 1,200 cu

Average income rose 3.85% yet the bottom fifth gained 30 cu a year. Growth and rising inequality can occur together.

Evaluation. Growth can raise absolute incomes at the bottom even when relative gaps widen; jobs and tax revenue from growth can fund transfers; very high inequality may itself slow growth by limiting opportunity; the effect depends on who gains from the growth and on the tax design.

When objectives support each other

Not every pair conflicts. Faster growth usually lowers unemployment and raises tax revenue, which helps the budget. Falling unemployment cuts benefit spending. A good answer says which relationship applies in the case given. Country R’s growth of 3.3% with unemployment falling from 5.4% to 4.3% is an example of objectives moving together. If the same growth then pulled inflation outside the 1% to 3% band, the conflict would appear. The question to ask each time is: which objective is the government prepared to give up a little of, and why?

Common errors

• Confusing real with nominal GDP, or quoting nominal growth as the objective.
• Drawing the Phillips curve with unemployment on the vertical axis.
• Calling every shift of the curve a movement along it.
• Saying any growth harms the environment, with no mention of intensity or technology.
• Treating a current account deficit as automatically bad, without asking about size and finance.
• Stopping at “inequality rises” with no chain or evaluation.

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.