2.6.3 Supply-side policies Flashcards
Are supply-side policies short-term or long-term?
Long-term.
They have a long time lag.
Aim of supply-side policies?
To expand the productive potential in an economy (by increasing LRAS), or to increase the trend rate of growth.
- Shown by a shift right in the LRAS curve or expansion of PPF.
What do supply-side involve?
Supply side policies are a set of policies which are meant to increase long-run productive potential and capacity of an economy and improve its efficiency
Main aims of supply side policies
- Improve incentives to work and invest in people’s skills (human capital)
- Increase labour and capital productivity
- Increase occupational and geographical mobility of labour
- Increase capital investment and research and development spending
- Promote contestability and stimulate innovation (dynamic efficiency)
- Encourage start-ups and expansion of new businesses especially those with significant export potential / promote economic diversification
- Improve price & non-price competitiveness in global markets
- Improve the trend rate of sustainable growth of real GDP to help support improved living standards & better regional economic balance
what is trend growth
Trend growth is the long term non-inflationary increase in GDP caused by an increase in a country’s productive capacity.
Types of supply-side policies
- Free market
- Interventionist
market based supply side policies
- Tax Cuts: Lowering tax rates, especially on businesses and high-income earners, is a fundamental aspect of free-market-based supply-side policies.
- Deregulation of markets: Reducing bureaucratic hurdles is another core element.
- Labour Market Flexibility: Advocates often support labour market reforms that reduce restrictions on hiring and firing
- Privatization: Transferring state-owned assets and services to the private sector is a way to inject market competition and efficiency
- Trade Liberalization: Reducing trade barriers, such as tariffs and quotas can enhance the competitiveness of domestic industries.
Free market supply-side policies
Free market supply-side policies aim to increase efficiency by removing things which interfere with the free market.
Examples of free market supply-side policies
- Tax cuts
- Privatisation
- Deregulation
- Policies to increase labour market flexibility.
Interventionist supply-side policies
Interventionist supply-side policies are usually aimed at correcting market failure.
Examples of interventionist supply-side policies
Government spending on:
- Education
- Subsidies for research and development
- Funding for improvements to infrastructure (e.g. ports than help firms to export their goods)
- Industrial policy (this is policy aimed at developing a particular industry or sector of the economy e.g. through subsidies).
Examples of supply-side policies used to encourage competition in the product market
- Deregulation
- Privatisation
- Contracting services out
- cutting red tape
Supply-side policies used to incentive firms to invest
Offer tax breaks if they invest their profits back into the business instead of paying dividends to shareholders.
Trade liberalisation
The process of removing or reducing trade barriers, and allowing goods and capital to flow more freely between countries.
Supply-side policies in the capital market
Deregulation of financial markets – e.g. The ‘Big Bang’ of 1986 removed a lot of the traditional ‘restrictive practices’ that were felt to have made British financial markets (e.g. banks and stockbrokers) inefficient.