Supply side policies

• What are supply-side policies?

  any government policy which aims to increase aggregate supply in the economy
• Define interventionist supply-side policy

  Interventionist policy in when the government increases intervention in the economy and is actively involved in increasing AS and will in turn increases real GDP.
• Define market-based supply-side policies

  When the government decreases its intervention in the economy to let the market operate freely
• Give some examples of Interventionist supply-side policies

  - Infrastructure Spending

  - Increased education spending

  - Increased healthcare spending
• Give some examples of market-based supply side policies

  - Reducing corporation tax

  - reducing minimum wage

  - privatisation and deregulation of markets

  - reducing income tax

  - reforming benefits (reducing)
• How can increased spending on infrastructure be used as a supply-side policy to influence economic growth?

  Improvement in infrastructure will improve geographical mobility of labour, increasing labour productivity, increasing the quality and quantity of labour as more workers can now get to work. This will increase LRAS, increasing real GDP and improving economic growth. Furthermore, improved geographical mobility will decrease unemployment.
• What is the demand-side benefit of increasing spending on infrastructure?

  There may be an increase in consumption for two reasons. The first being because unemployment decreases as a result of improved geographical mobility, there is a rise in incomes and as incomes rise consumption by consumers will also increase leading to a rise in AD. Secondly, improved infrastructure means more people can travel around to shops so spending and consumption will also increase. As both reasons increase AD, real GDP increases and so does economic growth.
• Evaluate the use of increased spending on infrastructure as a means to influence economic growth.

  There is a risk of crowding out in the short-run. Crowding out occurs when government spending pushes up demand for resources which will increase prices for the four factors of production such as costs for raw materials and rise in wages for labour. In the SR, this rise in prices will increase costs for private-sector firms and disincentives investments and so they have been crowded out. As a result, SRAS will decrease and so will real GDP, reducing economic growth.
• Give an example of increased spending on infrastructure by the government

  The UK government is spending £106bn on the new HS2 railway that will transport 26,000 passengers per hour from London to Manchester in just 68 minutes
• How can reduced corporation tax be used as a way to improve economic growth?

  If corporation tax decreases, firms can retain more - increasing supernormal profits as costs decrease, this creates an incentive for a rational profit-maximising firm to utilise dynamic efficiency and either expand the business or start a new one.

  
  

  
  

  
  

  SR: Increased entrepreneurship in the economy so an increase in SRAS, increasing; real GDP, economic growth and competition and reducing the general price level

  
  

  LR: As firms retain more profits, there is increased finance available for investments, this increases the state of technology and machinery - increasing productivity and shifting LRAS right. This results in a rise in real GDP and economic growth.
• What is the demand-side benefit of reducing corporation tax?

  In the LR - an increase in investments will increase AD and real GDP. Furthermore, as investment in technology rises, the quality of goods will increase, increasing domestic and international competitiveness, so as exports rise and domestic consumption increases, there will be a further increase in AD and real GDP.
• Evaluate the use of reducing corporation tax as a means to influence economic growth.

  Reducing corporation tax will come with opportunity costs for the government. Reducing tax means the government receives less tax revenue, the opportunity costs is that there's less money available for the government to spend in other areas such as healthcare and education and potentially reduce the quality of these services - could lead to an inward shift of LRAS in the LR
• How can reducing minimum wage be used as a way to increase growth?

  At the minimum wage, there is excess supply of labour - this is known as real wage unemployment as the wage level is set above equilibrium. This means that reducing/removing minimum wage will increase demand for labour and reduce quality supplied, bringing the wage level back to equilibrium. For firms this means a reduction in wage costs and cost of production - shifting SRAS out and increasing real GDP

  
• Evaluate the use of reduced minimum wage as a means to influence economic growth

  - The significance of reduced wages depends on the level of people who are currently being paid minimum wage ( 1.9 million people in the UK) . If their incomes decreases, they are very likely to reduce their spending and consumption as a result of decreased disposable incomes, reducing AD and reducing real GDP. This could have a more significant impact on growth than a fall in costs as consumption is the biggest component of AD.

  
  

  - In the LR: a fall in minimum wage could mean a rise in emigration as workers move abroad to seek relatively higher wages. As quantity of labour decreases, LRAS will shift inwards and decrease the productive capacity of the economy alongside real GDP.
• What is the current (and future) minimum wage for adults?

  April 2023 - £10.42

  
  

  April 2024 - £11.44
• Define deregulaisation

  When regulations are removed from markets to lower barriers to entry and is an example of a market-based supply-side policy
• How Can Deregulation Be Used to Increase growth?

  Deregulation will lower cost of production for a firm, this means producers are more willing to supply more a given price and so SRAS will shift right, decreasing price level and increasing real GDP.
• Define Privatisation

  Transfer of state owned public-sector firm to the private sector.
• How can privatisation influence economic growth?

  Private investors/shareholders will pressurise companies to profit maximise, creating more incentives to become more efficient and decrease costs - this increases SRAS and real GDP
• How can increased spending on education influence economic growth

  if the government increases education spending such as subsidising university education, tuition fees (price of education) will decrease, this will increase demand for university education and the number of students at university will increase. As a result, there will be a higher number of qualifies workers in the labour market and will increase productivity - this will increase LRAS and economic growth
• Evaluate the use of increased spending on education as a means to increase in the growth


  SR: In the Sr, if there are more students, there will be fewer workers in the labour market. This will decrease labour supply and increase wages, as wage costs rise - the cost of production will also increase and reduce SRAS, reducing economic growth.

  
  

  LR: effect on growth may be limited depending on the courses that have been subsidised. e.g. courses such as Theoretical Physics may not contribute a significant amount to growth as they are not used regularly in an office
• How can reducing income tax be used as a means to increased economic growth?

  Lower income tax means workers keep more of their incomes - increasing incentives to work overtime and more hours, this means that workers will reduce their leisure hours and increase their work hours. This will increase labour supply and cause wages to decrease wages and result in decreased costs of production and increase SRAS - leading to economic growth
• What is the demand-side benefit for reducing income tax?

  Decreasing income tax will increase disposable incomes and increased consumption - increasing AD. an increase in AD will increase profits for firms who will increase demand for labour to meet the increased demand, this means even more people are spending more money and and cycle will repeat - this is known as the positive multiplier effect.
• Evaluate the use of reducing income tax as a way of increasing economic growth.

  Workers may choose to work fewer hours as they will be keeping more of their incomes, this means that they can reduce their work hours and still pay for necessties and consume the same amunt they used to - this means workers increase their leisure hours and decrease their labour supply.

  As labour supply decreases, wages will increase as well as costs of production so firms will choose to decrease SRAS and real GDP as well as limit economic growth
• How can reducing benefits increase economic growth?

  As benefits are reduced, unemployed workers will have less money to live on increasing incentives to work. This will increase labour supply causing wages to decrease. As wage costs decrease, cost of production will decrease and increase SRAS - increasing real GDP and economic growth
• Evaluate the use of reduced benefits to improve growth.

  A reduction in benefits means less money transfered to the unemployed and low-income households - they now have reduced disposable incomes and must reduce their spending; this reduces AD, real GDP and economic growth. This can also result in the downward multiplier effect and increases income inequality as the poor will receive less money.

  
  

  Therefore it may be best that the government reform benefits rather than reduce them e.g. in 2015, the government reformed disability benefits so only those who really needed it received benefits, this means they still had an income and everyone else was incentivised to find work.
• How can increased spending on healthcare improve economic growth?

  As the government increases NHS funding, this will result in a healthier workforce, increasing productivity and LRAS. Improved NHS also means fewer sick days for workers, increasing labour hours and shifting LRAS out again - increasing real GDP and economic growth
• What is the annual loss in productivity due to ill health

  £77 billion annual loss in productivity
• Evaluate the use of increased healthcare spending as a way to improve the economy

  The significance of increased healthcare spending depends on the quality of the spending. There's a risk that a lot of funding may be used towards admin and paperwork (known as bureaucracy). Furthermore, money could also be spent inefficiently rather than going towards effective technology and treatments - has no effect on productivity so growth in the LR may be limited