Supply-side Policy

• What is a Trade Union?

  An organised association of workers in a trade, group of trades, or profession, formed to protect and further their rights and interests.
• What are some extra details about Trade Unions?

  • Influence political parties.
  • Through collective bargaining, unions have historically been successful in negotiating higher wages and better working conditions for their members. This directly improves the livelihoods of individual workers and indirectly spurs economic growth by boosting consumer spending.
• What are the two main types of supply-side policies?

  • Free-Market Based
  • Interventionist
• What are free-market-based policies?

  Involves policies to increase competitiveness and free-market efficiency. For example, privatisation, deregulation, lower income tax rates, and reduced power of trade unions.
• What are interventionist policies?

  Involve government intervention to overcome market failure. For example, higher government spending on transport, education and communication.
• What is meant by privatisation (free-market orientated)?

  
  

  • Sell State owned assets to private sector - improve incentives.
  • It prompts innovation and better decision-making, based on market signals rather than political considerations.
  • It helps increase competition, improve efficiency, and stimulate economic growth. - Key aspect of economic reform.
• What is meant by deregulation (free-market orientated)?

  • The removal of regulations or restrictions, especially in a particular industry.
  • Allow new firms to enter market - open monopolies to competition.
  • Lowers costs of productions and lowers costs for consumers.
  • these factors help stimulate efficiency and lead to increased economic growth.
• What is meant by income tax cuts (free-market orientated)?

  
  

  • A decrease of how much you will pay.
  • Increases aggregate demand through increased consumption which can cause the economy to grow more quickly.
• What is meant by removing regulations/red tape (free-market orientated)?

  • Reduces excessive regulation, pointless delays, inefficiency, rigid conformity to formal rules and frustration.
  • This saves time and resources and speeds up decision-making process.
  • Makes it easies to build new factories and housing.
• What is meant by flexible labour markets (free-market orientated)?

  • Allows companies to make changes such as employee hiring and firing, compensation and benefits, working hours and conditions.
  • Reduce power of Trade Unions, minimum wages and regulations.
• What it meant by free trade agreements (free-market orientated)?

  • Treaties between two or more countries designed to reduce or eliminate certain barriers to trade and investment , and to facilitate stronger trade and commercial ties between participating countries.
  • Free trade has allowed many countries to attain rapid economic growth.
  • Reduce tariff barriers and other obstacles to trade.
• What is meant by reducing welfare benefits (free-market orientated)?

  • reduces a system of financial support.
  • Increases incentive to get a job.
• What is meant by public sector investment (interventionist)?

  
  

  • Public sector investment in infrastructure - improve transport and reduce costs.
  • Positive impact on growth, trade, and household welfare.
• What is meant by education (interventionist)?

  • Increase funding to schools and universities - improve labour productivity.
• What is meant by vocational training (interventionist)?

  Government schemes to provide new skills to those who lose jobs.
• What is meant by housing supply (interventionist)?

  Increased supply of council housing improves geographical mobility.
• What is meant by health spending (interventionist)?

  Public spending on health can reduce hours lost to ill-health.
• What is the goal of supply-side policy?

  • These are policies to increase the country’s long term growth potential (productive potential).
  • A successful supply side policy will shift a country’s production possibility frontier to the right.
• What are the key supply-side challenges for the UK economy?

  • persistent productivity gap
  • high rates of youth unemployment
  • low trend growth rate of real gDP
  • rise of emerging nations
  • deep and widening regional economic divide
  • structural trade deficit (current account of BOP)
  • low capital investment and research
  • using inequality/relative poverty
• Why is a persistent productivity gap a key supply-side challenge for the UK economy?

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• Why is high rates of youth unemployment a key supply-side challenge for the UK economy?


  Lack of supply of labour and also the government may have to invest more in vocational training to help young people aquire skills.
• Why is low trend growth rate of real GDP a key supply-side challenge for the UK economy?


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• Why is a rise in emerging nations a key supply-side challenge for the UK economy?


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• Why is deep and widening regional economic divide a key supply-side challenge for the UK economy?


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• Why is a structural trade deficit (current account of BOP) a key supply-side challenge for the UK economy?


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• Why is low capital investment and research a key supply-side challenge for the UK economy?

  Lower productivity.
• Why is using inequality/relative poverty a key supply-side challenge for the UK economy?


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• What is production?

  Value of output of goods and services e.g. measured by GDP or an index of production.
• What is productivity?

  • A measure of the efficiency of factors or production.
  • Measured by output per person employed or output per person hours.
• What is the difference between production and productivity?

  An increase in production DOES NOT automatically mean an increase in productivity - It depends on how many factors of production have been utilised to supply the extra output.
• Why does the UK economy lag on productivity?

  • low rate of new capital investment in the UK
  • banking crisis affecting lending to businesses
  • possible slowing rates of innovation
  • persistent skills shortages in key industries
  • relatively low levels of market competition
  • low aggregate demand & high spare capacity
• Explain expansionary supply-side policy using the Keynesian diagram:

  • If economy is running up against capacity constraints, government might implement a supply-side policy.
  • E.g., investment into training & education should boost LRAS to LRAS1.
  • Has positive effect on inflation (price level from P to P1).
  • Economic growth has been enhanced to Y1, also creating employment. Productive potential also increased to FE1.
  • With more highly skilled workforce, may Improve competitiveness of UK exports in terms of both quantity & quality, which, certeris paribus, may improve BOP on current account.
• What effect does supply-side policies have on LRAS?

  • In theory, supply-side policies should increase productivity and shift long-run aggregate supply (LRAS) to the right.
  • Shifting AS to the right will cause a lower price level. By making the economy more efficient, supply-side policies will help reduce cost-push inflation.
• What are the pros of increase in education spending as a supply-side policy?

  
  

  • Productivity can increase
  • Can improve quality & quantity of labour
• What are the cons of an increase in education spending as a supply-side policy?

  
  

  • Opportunity cost
  • Time lags e.g. university is 4 years
  • Money may not be allocated properly and evenly
• What are the pros of subsidies as a supply-side policy?

  
  

  • Lowers costs of production for businesses -> could lead to higher wages for employees
  • Could encourage new firms to enter the market
• What are the cons of subsidies as a supply-side policy?

  • Firms may keep money for extra profit rather than raising wages
  • Could lead to a saturated market
• What are the pros of deregulation as a supply-side policy?

  • Lowers cost of importing
• What are the cons of deregulation as a supply-side policy?

  • Worse for domestic businesses as there is more of an incentive to import
  • The country exporting gains less revenue
• What are the pros of an increase in spending on transport as a supply-side policy?

  • Increased productivity
  • Lower pollution