3.7 Supply Side Policies

Question 1

What is a supply-side policy?

Answer 1

Supply-Side Policies are policies designed to increase the productive capacity of the economy, this can be intervention or market based.

Question 2

What is the difference between market based supply side policy and interventionist supply side policy?

Answer 2

• market based ssp is not from the government and is focused on reducing its influence, while interventionist based is more government involved

Question 3

What are the 3 reasons/goals for SSP’s?

Answer 3

• Increase in the quantity of factors of production
• Increase in quality of factors of production
• Increase in the productive efficiency

Question 4

What are the 3 interventionist SSP’s?

Answer 4

• Increased Government Spending on education and training
• Increased Government Spending on infrastructure
• Increased subsidies to firms to promote investment

Question 5

How does an increase in government spending on education increase the productive capacity of the economy?

Answer 5

• more spending in education or training will do either or both of increasing the quantity of factors of production (more NHS staff e.g) or increase the quality of factors of production (more skilled teachers)

Question 6

How does an increase in government spending on infrastructure increase the productive capacity of the economy

Answer 6

• an increase in spending on infrastructure means that there is an increase in the productive efficiency of the economy as transporting raw materials and factors of production is easier and more efficient

Question 7

How does an increase in government subsidies increase the productive capacity of the economy?

Answer 7

• this will increase the quantity of the factors of production as firms have more left to invest in capital
• will increase the quality of factors of production as firms have more left so can invest in better capital
• will increase the productive efficiency of production as firms have capital which will be more efficient than labour

Question 8

Which objectives do SSP’s affect?

Answer 8

• if successful, all of the 4 main macroeconomic objectives will improve

Question 9

How does lowering income tax increase the productive capacity?

Answer 9

• for those who are outside the labour force, they are incentivised to return to work as there is lower tax on wages thereby increasing quantity of labour
• Those in work also have an incentive to work harder and earn more as they keep more of it which will boost quality of labour

Question 9

How does lowering corporation tax increase the productive capacity of the economy?

Answer 9

• this will increase the quantity of the factors of production as firms have more left to invest in capital
• will increase the quality of factors of production as firms have more left so can invest in better capital
• will increase the productive efficiency of production as firms have capital which will be more efficient than labour

Question 10

How does reducing benefits increase the productive capacity of the economy?

Answer 10

• people out of the labour force to enter the labour force as people earn less outside increasing the quantity of labour

Question 11

How does reducing minimum wages increase the productive capacity of the economy?

Answer 11

• reducing min wages mean the costs of production will reduce in the long run increasing productive efficiency

Question 12

How does reducing trade union power increase the productive capacity of the economy?

Answer 12

• reducing trade union power mean the costs of production will reduce in the long run increasing productive efficiency

Question 13

How does privatisation increase the productive capacity of the economy?

Answer 13

• privitsation of companies means they have to be more competitive in the market which will increase the productive efficiency of the economy

Question 14

How does deregulation increase the productive capacity of the economy?

Answer 14

• deregulation means they have to be more competitive in the market which will increase the productive efficiency of the economy

Question 15

How does Trade Liberalisation increase the productive capacity of the economy?

Answer 15

• Trade Liberlaisation means they have to be more competitive in the market which will increase the productive efficiency of the economy

Question 16

How can you evaluate SSP’s?

Answer 16

1. no guarantee of any of these working (e.g firms may decide not to invest in capital with spare profit)
2. The policies are costly, and if they do not work it could be brutal
3. They have large time lags, e.g government projects take time to take effect
4. There are some negative stakeholder imapcts (reducing min wage, trade unions etc.)
5. There may be an output gap if the economy is at a recession, there will be no point increasing the capacity of the economy
6. There needs to be targeted SSP’s, not just random (e.g if roads are bad go for infratsructure)