Unit 5.4 - Supply-side policy

• Supply-side policy


  Policy to increase aggregate supply by improving productivity
• Supply-side policy objectives


  • To increase aggregate supply by improving productivity
  • To increase capacity and shift the economy's long-run aggregate supply curve to the right
  • Despite increasing aggregate supply, it may not raise output if there is spare capacity (will not be used if there is insufficient aggregate demand)
• Education and training


  1. To raise the quality of education and training

  2. To raise workers' skills, productivity and mobility
• Support for technological improvement

  Encourage the development of new technology using subsidies
• Supply-side tools


  • Promoting infrastructure development
  • Developing efficient transport, power, energy and telecommunication networks
• Alternative supply-side tools


  • Cuts in corporate tax
  • Cuts in income tax
  • Trade union reform
  • Privatisation and deregulation
  • Encouragement of immigration
• Impact of supply-side policy

  • Increases income and output by increasing the productivity of labour and capital resources, by increasing quality and quantity of resources
  • If aggregate supply can keep up with higher aggregate demand, a country can enjoy higher output without demand-pull inflation
  • Improved skills, flexibility and mobility through training, reducing frictional and structural unemployment - possibly not technological
• Effectiveness of supply-side policy

  • Spending on education and training is more effective in the long run - improving productivity
  • Spending on education and training takes too long to affect the short-run
  • Spending on education and training may affect inflation in the short-run (increases aggregate demand before it increases aggregate supply)
  • Spending on education and training needs to be high quality to be effective
  • If workers' pay rises more than their productivity, costs of production will increase
  • Spending on infrastructure can be expensive and takes time
  • Technology / demands have changed by the time infrastructure is complete
  • Spending on infrastructure has environmental effects
  • Spending on technology leads to new jobs appearing while some are lost
  • Not everyone copes well with changes due to technology