Trade offs

Economy is a very complex domain. Each action and alteration might have a major impact on various areas of the economy. Sometimes, while trying to solve one issue, government might cause series of other problems. This situation, that involves loosing one quality or aspect of something in return for gaining another quality or aspect is called a trade off.

Here are some examples of this phenomenon:

Economic growth and inflation:

When the economy developes quickly, companies will most likely have to hire more well - qualified stuff. That leads to deficit on the employment market, which eventually results in payment inflation and price increase.

The inflation is linked with unemployment (diagram below) so a rapid economic growth migh actually reduce the number of jobs.

Diagram of Phillips Curve

Economic growth and the balance of payments:

When the economy grows, people usually earn more so the spend more. They tend to take more loans.

So the higher the cenomic growth is, the bigger the peoples account deficit.

Economic growth and the budget deficit:

So when the government tries to lower the budget deficit, it might higher the taxes and reduce spendings. But when they save to much the AD will decrease, which will lead to decrease in economic growth. Government cuts might may also cause an employment reduction. Therefore, the state will have to spend more on the wealthfare so as a result, the attempts ofreducing the budget deficit may actually increase it.

Economic growth and the enviroment:

The bigger the economy is, the more harm to the enviroment it causes. Polluted enviroment affects the quality of living. So as we see, in some aspect the economic wealth lowers our actuall standard of living.