5.2 Supply-Side Policies Flashcards
Supply-side policies definition
Deliberate actions taken by the government designed to increase the LRAS of the economy
Supply-side improvements definition
These arise out of general increases in productive capacity resulting from businesses acting out of their own interest in improving efficiency and the quantity of their output
What is the link between supply-side improvement and supply-side policies?
Direct supply-side policies adopted by the government will also lead to supply-side improvements
Effects on GDP from supply-side policies
- increasing the capacity of the economy should lead to higher GDP
- increase trend rate of growth
- needs to be used in conjunction with AD boosting policies to increase GDP
Effects on unemployment from supply-side policies
lower unemployment from:
- lower income tax + reduced welfare benefits = more people wanting to work + work harder
- improvements in education and training
- investment in infrastructure = attract more businesses to the UK
Effects on inflation from supply-side policies
Lower inflation from:
- more capacity = AD has less pressures = less demand-pull inflation
- deregulation = more competition = less monopolistic power, so prices don’t rise as easily
Effects on the balance of payments on current account from supply-side polices
Improvements to the balance of payments from:
- downside pressure on inflation = exports more price competitive
- a more productive workforce should also lead to lower priced goods = cheaper
- quality of output should improve with education and training = increase demand for UK exports
Free market supply-side polices definition
Those policies designed to make markets work more efficiently and thus increase aggregate supply for the economy
Privatisation definition
The sale of state-owned enterprises to the private sector
Deregulation definition
The removal of barriers to competition in an industry
Ladder curve definition
Shows how high income tax rates can actually reduce tax revenue due to the reduced incentive to work
What graph shows how reducing income tax will increase tax revenues
The laffer curve
Describe how the Laffer curve works
If tax revenues are cut down towards T* then taxes revenues actually increase as there is now a greater incentive to work as they keep more of their earned money = decreases voluntary unemployment + more people working = more money spend on goods and services that could have VAT
Free market supply-side policies
- income tax cuts
- reduction or elimination of minimum wage legislation
- reduction in unemployment benefits
- reduction in labour protection
- zero-hour contracts
- privatisation
How does reduction in labour protection improve the supply side of the economy?
By reducing things such as sick pay, holiday pay ect. It reduces cost for firms = they can employ more workers
How does privatisation improve the supply side of the economy?
- moving businesses into the private sector increases efficiency as private businesses will pursuit profit max
Interventionist supply-side policies definition
Designed to increase aggregate supply by intervening more in markets, often accompanied by higher targeted government expenditure
Interventionist supply-side policies
- education
- training
- industrial policy
- research and development subsidies
How does education and training improve the supply-side of the economy?
- giving the worker force a better set of skills = reduce occupational immobility + structural unemployment
- increase productivity of the workforce = increase the productive capacity of the economy
What are industrial policies?
- they are changes in legislation affecting the labour market
E.g = tax breaks, grants to businesses
What is the natural rate of unemployment?
The rate of unemployment that exists because of structural and frictional causes
Policies that specifically reduce the natural rate of unemployment
- improvements in education reduced occupational immobility as workers have a larger variety of skills
- higher investment in transport infrastructure = reduces geographical immobility as workers find it easier to move to vacancies elsewhere
- lower taxes on incomes + reduce benefits = incentivise work
What is the natural rate of unemployment in the UK?
5%
What are the limitations of supply-size policies?
- cutting benefits is likely to increase poverty
- reducing the rights of workers may prove unpopular with workers
- these policies may take years to show significant effect
- reducing the rate of tax can lead to a more unequal distribution of wealth