To what extent might rapid economic growth conflict with at least two other macroeconomic objectives?

Macro-economic objectives are aims which the government put into place for the good of the people living in the country. One of these aims is Economic growth - known as the increase of real GDP or real output of a given economy at a given time. This can be shown by a right shift of AD in the diagram below where real output increases from Y1 to Y2. Other aims the government have in mind when dealing with the economy are low inflation, low unemployment, even balance of trade (Imports-Exports) and also environmental sustainability and distribution of income. Price level

P2 P1

Please excuse no YFe as lack of space AD Y1 Y2 Real GDP

The first conflict that occurs when there is rapid economic growth is between Inflation and growth. As shown in the diagram above, AD shifting outwards causes an increase in inflation (from P1 to P2) as well as an increase in growth. This is due to the causes for the rapid growth (such as an increase in Consumer spending) leading to prices rising as there is increased demand. This rise in inflation rising has many negative effect on both firms and individuals living in the country. Both consumers and businesses lose confidence as well the country being seen as less competitive as prices rise leading to a fall in exports, as I will mention below. The current aim for the UK is 2% inflation and it is currently above that target at 2.7% - tolerance being up to 3%. This does not allow much room for increase of inflation without coming out of tolerance and so rapid economic growth would negatively affect one aim although fulfilling another. In addition, Inflation will ultimately cause economic growth to slow down as there will be less consumer demand and Investment (due to less confidence as mentioned above) and so AD , and thus growth, will fall by an amount. This shows economic growth increasing leads to the effect of inflation which ends up reducing the rate of growth. An exception could be where this effect would not be shown would be if the Economic growth was due to supply side policies rather than demand side. This would mean an increase in the LRAS curve and so there would be growth, yet no inflationary effects. This is shown in the diagram below were inflation remains at P1 (slight reduction due to diagram not being exact) although growth rises from Y1 to Y2.

Please excuse no YFe as lack of space P1

Y1 Y2

Another macro-economic objected that is somewhat compromised when there is rapid economic growth is the balance of payments. High GDP growth usually means more income for the inhabitants of the country and so they have more disposable income. This then leads to an increase in imports - which is particularly true when an economy has a high marginal propensity to import like the UK. In addition, inflationary affects (mentioned above) lead to reduced competiveness and so exports falling (price rising lowers demand). This then means X (Exports) falls and M (Imports) rises and so the balance (X-M) is worsened causing an even higher trade deficit than the current 14.0 billion in the fourth quarter of 2012 for the UK. However, this may not always be the case. In the case of exports, it depends on the magnitude of the rise of prices and the weighing of this in the eyes of countries buying the products. If there is only a small rise in prices, or if the product is inelastic and price is not a major factor for those buying the product, there is limited impact on exports. Another point is that there may not necessarily be a major rise in imports as incomes rise. This is due to the fact that such a fast growing economy would be producing a greater variety of products than before and so reducing the need for as many products to be bought from abroad. Thus, the disposable income gained would be spent in the economy of the country, further fuelling growth. A third macro-economic objective that is worsened by rapid growth is environmental sustainability. Increased growth comes with increased production of an economy which means a higher demand for resources, most of which affect the environment when produced. These are known as negative externalities on the environment which include pollution and congestion. For example, China is a country that has greatly grown in the last 20 years from 1989 until 2012, China GDP Annual Growth Rate averaged 9.23%. However, the number one most polluted city in the world is Linfen, China a result of this growth. This, in turn, negatively affects those living in the country by health issues (such as asthma for those living in Linfen) as well as uncertainty for future generations. The aim of sustainability of the environment is thus worsened by rapid economic growth. However, there is a point for consideration when discussing the effect on environmental sustainability. It depends on what measurements are in place to deal with negative externalities on the environment. For example, a country may have a limit on carbon dioxide emissions from a factory or firm and so growth that occurs may not have affected the environment as much as thought. Also, there are several green technologies available and so the government of the country may provide or encourage the usage of these for firms, again reducing effects on the economy.