Supply-side policy

• Supply side policies aim:

  • To increase country's long term trend growth (to shift LRAS outwards)
  • To increase the productive potential of the economy (to shift PPF outwards)
• Supply-side improvements


  Actions made by firms within the supply side of the economy to enhance its performance and efficiency
• Effect on economic growth

  The potential national output increases, leading to higher real GDP
• Effect on unemployment

  Reduced labour costs and more labour market flexibility through:

  • Decreasing or abolishing minimum wages to lower the costs of production
  • Restructing the unemployment benefits system to incentivise the unemployed to seek work
• Effects on inflation

  Reduced average price levels (APL) will be acheived by deregulating the market and reducing taxes as it reduces businesses' costs of production so there will be less cost-push inflation
• Effect on balance of payments

  Throung a increased spending on innovation, and subsidies it is possible to increase international competitiveness because this can increase the value of net exports and this will lead to the balance of payments on the current account to increase
• Free market supply-side policies


  Policies that encourage competition, market reform, and create incentives to increase LRAS
• Types of free market policies:

  • To increase incentives
  • To improve competition
  • To reduce labour costs and create labour market flexibility
• Sypply-side improvements to increase incentives

  • Reducing corporation tax rates that incentivises to work harder (so they can increase their profits) and provides extra money that they can use to invest in new technology or machinery
  • Reducing capital gains tax (profit imposed tax)
• Deregulation


  The process of removing government controls in order to increase competition
• Supply-side improvements to improve competition

  • Deregulation decreases costs which may result in greater supply
  • Privatisation encourages new firms to enter the market and compete, thus increasing AS in the economy
• Privatisation


  The transfer of ownership and control of assets from the public sector to the private sector
• Supply-side improvements to

  reduce labour costs and create labour market flexibility

  • Decreasing or abolishing minimum wages to lower costs of production
  • Reconstructing the unemploymet benefits system to encourage people to seek work
• Advantages of free market supply-side policies

  • Improved resource allocation: Increasing the productive capacity of an economy required more efficient use of its resources, including labour
  • No burden on government budget: allowing the market to control efficiency and resource allocation leaves no need for government spending
• Disadvantages of free market supply-side policies

  • Time lags are too long between expenditure and seeing benefits
  • Equety issues: the distribution of income worsens as labour market reforms and wage policies lower worker's wages
• Diagram to illustrate supply-side policies

  Successful supply-side policies will increase the long-run aggregate supply (LRAS)

  
• Interventionist policies


  Policies that require government intervention in order to increase the full employment level of output
• Types of interventionist policies

  • Education and training
  • Research and development
  • Industrial policies
  • Improving healthcare
• Supply-side improvements for education and training

  • Increased government spending on education and training improves the quality and quantity of the workforce resulting in productivity improvements
• Supply-side improvements to improve healthcare

  • Increasing goverment spending on healthcare so productivity improves
• Supply-side improvements in research and development

  • Increased government spending on innovation increases the supply of potential jobs in the economy, and possibly lowers the costs of production
• Supply-side improvements to industrial policies

  • Industrial policies are direct and targeted support to firms or industries in the form of subsidies
• Advantages of interventionist supply-side policies

  • Improvements in living standarts: improvements in infrastructure can improve the quality of life for all citizens
• Disadvantages of interventionalist supply-side policies

  • Costs: thay are expensice as they involve using tax revenue that can lead to a budget deficit
  • Time lags: due to their long-term nature, changes in government can result in changes to budgets therefore interventionalist supply-side policies are known to be less effective
• Supply-side policies


  Policies that are aimed at increasing the production capacity of the economy focusing on the factors affecting the supply side such as labour, capital, technology and entrepreneurship