Trade-offs

Question 1

Trade-offs Examples

6 of them

Answer 1

• Economic Growth and Inflation
• Economic Growth and Environmental Sustainability
• Economic Growth and Inequality
• Economic Growth and Balanced Budget
• Economic Growth and Balancing the Current Account
• Low Unemployment and Low Inflation

Question 2

Economic Growth and Inflation

Answer 2

When an economy grows rapidly, multiple inflationary pressures emerge:

1. Resource Competition

Example: During China’s rapid growth in the 2000s, its increasing demand for raw materials such as iron ore drove global prices from $30/ton in 2003 to over $180/ton by 2008
As companies compete for limited skilled workers, wages rise sharply (wage-push inflation)
Factory capacity becomes fully utilised, leading to higher production costs

2. Demand-Pull Effects

Rising incomes lead to higher consumer spending
Example: Australia’s mining boom in 2004–2012 led to significant wage growth in mining regions, pushing up local housing prices and general inflation

Question 3

Economic Growth and Environmental Sustainability

Answer 3

The environmental Kuznets curve suggests environmental degradation first rises then falls with economic development:

1. Industrial Phase

Example: China’s rapid industrialisation led to severe air pollution in cities such as Beijing, with PM2.5 levels frequently exceeding WHO guidelines by 10–20×
Deforestation: Indonesia lost over 25% of its forest cover between 1990 and 2020 during its economic expansion

2. Resource Depletion

Example: Saudi Arabia’s economic growth has led to rapid depletion of its aquifers, with some estimates suggesting they could be depleted within 50 years
Rare earth minerals essential for technology are being depleted at accelerating rates

Question 4

Economic Growth and Inequality

Answer 4

The relationship manifests in several ways:

1. Capital Returns vs Wages

Example: During the US tech boom of the 2010s, the wealth of tech company founders grew exponentially while median wages increased only marginally
The ownership of automation technology concentrates wealth among capital owners

2. Skill Premium

Example: In India’s IT boom, software engineers’ salaries grew 10–15% annually while agricultural workers’ wages stagnated
Educational disparities lead to widening income gaps

Question 5

Economic Growth and Balanced Budget

Answer 5

Government spending to stimulate growth often creates deficits:

1. Infrastructure Investment

Example: Japan’s fiscal stimulus in the 1990s pushed public debt to over 200% of GDP
US infrastructure spending typically requires deficit financing

2. Counter-cyclical Policies

Example: The 2008 financial crisis required massive deficit spending to prevent economic collapse
Tax cuts to stimulate growth often reduce revenue in the short term

Question 6

Economic Growth and Balancing the Current Account

Answer 6

Growth typically affects trade balances:

1. Import Demand

Example: As South Korea developed, consumer demand for foreign luxury goods increased dramatically
Rising incomes lead to higher consumption of imported consumer goods

2. Industrial Inputs

Example: India’s growth has led to rising oil imports, contributing to its current account deficit
Manufacturing growth often requires imported machinery and raw materials

Question 7

Low Unemployment and Low Inflation

Answer 7

The Phillips curve relationship manifests through:

1. Wage Pressures

Example: In the US tech boom of the late 1990s, unemployment fell below 4%, leading to wage inflation
Labour shortages in specific sectors can drive up wages across the economy

2. Capacity Constraints

Example: Germany’s low unemployment in 2018–19 led to capacity constraints and wage pressures
When businesses operate at full capacity, they raise prices to manage demand