AS And Supply Side Pilicies

Question 0

Productivity

Answer 0

Output per unit of factor input

Question 1

Aggregate supply

Answer 1

Total volume of gode and services that all firms in an economy are willing to supply at any given price

Question 2

Labour productivity

Answer 2

Output per worker

Question 3

Why is SRAS curved?

Answer 3

To reflect varying price elasticity of supply in the short run
When economy is operating well short of full capacity it is relatively easy for firms to respond to an increase in the price level

Question 4

Why does SRAS become vertical?

Answer 4

When economy is closer to full capacity firms are unable to respond quickly to an increase in the price level - respond in elasticity as majority of labour is already being employed, those left unemployed are least productive / skilled , capital is working at full capacity and there is no excess stock

Question 5

Factors affecting SRAS (5)

Answer 5

1) CHANGES IN LABOUR COSTS:a change in wage rates will shift SRAS curve ( LRAS remains constant) -cheaper wages decrease the production costs of firms and so SRAS shifts outwards - rise in wages would cause inward shift and cost push inflation
2) COMMODITY PRICES: changes to raw material costs and other components will affect firms costs and shift SRAS inwards or outwards accordingly ; as a large proportion of commodities is imported changes in prices will also affect AD
3) EXCHANGE RATE: costs may be affected by changes in exchange rate - fall in exchange rate increases import costs shifting SRAS inwards
4) GOV TAXATION & SUBSIDIES:
5) GLOBALISATION & IMPORT PRICE: availability of cheaper component imports will shift SRAS out while imposition of tariff/ import quota will reduce supply available at each price level

Question 6

Factors affecting LRAS (5)

Answer 6

1) CHANGES TO LABOUR SUPPLY: any in change in size of workforce will impact LRAS - membership in eu + ( relaxed immigration requirements for non eu citizens) = influx of migrants shifting LRAS out, increasing retirements age will increase workforce size & shift LRAS out, fall in birth rates
2) LABOUR PRODUCTIVITY: improvements in education, training, human resource management can all result in improvement in labour productivity & LRAS shifts out ( however initial effect of increased gov spending will expand AD and LRAS will only shift after time lag)
3) IMPROVEMENTS TO LABOUR MOBILITY: policies that help improve labour mobility will shift LRAS out
4) INCREASE IN QUANTITY/ QUALITY OF CAPITAL STOCK: increase in capital stock of economy shifts LRAS out
5) INCREASING COMPETITION+ EFFICIENCY : deregulation of markets , allowing businesses to set up more easily, removal of bureaucracy , establishing enterprise zones
6) STIMULATE INVENTION+ INNOVATION

Question 7

Supply side policies

Answer 7

Macroeconomic policies designed to imported supply side potential of economy ( shifting LRAS out) to make markets and industries operate more efficiently and contribute to a faster underlying rate of growth of real national output - POSSIBLE TO GENERATE ECON GROWTH WITHOUT INFLATION

Question 8

Supply side objectives (6)

Answer 8

1) IMPROVE WOKR INCENTIVES- cut income tax, reduce unemployment benefits and invest in skill development ( training job centres) to help unemployed find work
2) INCREASE LABOUR PRODUCTIVITY-investment in education, training, capital goods to make workforce more productive
3) INCREASE CAPITAL PRODUCTIVITY- attracting foreign investment + encouraging innovation, research, development
4) INCREASE OCCUPATIONAL + GEOGRAPHICAL MOBILITY OF LABOUR
5) PROMOTING MORE COMPETITION - blocking mergers and removing trade barriers
6) ENCOURAGE START UP- establishing enterprise zones where it is cheaper for new for new businesses to set up

Question 9

Free market approach (5)

Answer 9

1) Cut gov spending& taxes to reduce burdens on private sector
2) introduce laws to limit trade union powers and improve flexibility of labour market ( firing + hiring)
3) Keep gov intervention to minimum to avoid failure ( dissolving quangos, gov agencies
4) Tough competition laws aimed at improving efficiency and international competitiveness
5) Laws to protect intellectual property ( patents, copyrights- increase incentive to invest + innovate

Question 10

Interventionist approach (4)

Answer 10

1) State has key role in investing in public services & building critical infrastructure for long run economic benefits ( education, infrastructure)
2) Tax incentives & welfare reforms encourage more people to work
3) Regional policy to boost under performing areas / areas of high unemployment
4) controlling international trade to allow does tic industries to expand

Question 11

Supply side policies and recession

Answer 11

1) reduction in business taxation
2) improving quality of and access to education and training for all-when coming out of recession new jobs may be in different industries to before recession and so this is needed to prevent cyclical unemployment from turning into structural unemployment
3) stimulation of business start ups

Question 12

Evaluation of supply side policies

Answer 12

1) TIME LAGS:
2) EXPENSE: opportunity cost- paying down deficit/ debt
3) EQUALITY: some policies have adverse effects on income distribution - widening income gap, more poverty, increase of Gini coefficient
4) AD- supply side policies assume sufficient level of. AD

Question 13

Measuring productivity- output per worker

Answer 13

= real GVA \ number of workers employed

Question 14

Output per job

Answer 14

= real GVA/ number of jobs

Question 15

Issues with productivity statistics

Alternative measure

Answer 15

Do not consider number of hours each worker works

Output per hour= real GVA / number of jobs x av n of hours worked

Question 16

Effects of productivity growth on living standards

Answer 16

Main determent of LRG and improvements in living standards over time is increased potential output- outwards shifts of LRAS and this comers from increases productivity

1) as output per worker increases potential real GDP per person increases ( increased pop also expands LRAS but does not increase output per capita)
2) as workers generate a higher input for their labour time and thus a greater value of production fro the firm they can be compensated with higher wages so that REAL INCOMES RISE - MORE PRODUCTIVE WOKERS CAN THUS PAY FOR THEIR OWN WAGE RISE - higher purchasing power

Question 17

Evaluation of effects of productivity on living standards

Answer 17

A Keynesians note there is no gain in growth if these increases in potential output cannot be sold , therefore we are assuming here that there is sufficient aggregate demand to justify the increase in productivity
Otherwise potential output might rise but actual output ( real GDP) does not and the negative output gap will just get bigger

Question 18

Effects of increased Productivity on employment

Answer 18

Derived demand means that labour is in demand because of the output that they create - INCREASES IN LABOUR PRODUCTIVITY WILL INCREASE DEMAND FOR LABOUR ( plus higher incomes that will be paid out to more productive labourers might generate more consumption and therefore beneficial positive multiplier effects which create more jobs for other workers

Question 19

Evaluation of effect of productivity on employment

Answer 19

As with growth evaluation the employment effects of productivity increases depend on there being enough additional demand for the product that these workers are capable of making ; if workers get more productive but the firm has no need for additional output then they could actually fire some workers sn unemployment would rise
Also if productivity improvements are a product of improvements in the capital stock through investment then it could be that capital is a substitute for labour and that the firm no longer needs such a large workforce as it has become automated instead - disruption caused by advent of new technology can cause structural unemployment and severe hardship unless workers have transferable skills to be able to adapt to changing demands of workforce

Question 20

Increased productivity deflationary effects

Answer 20

Since increases in productivity can expand the potential output of the economy they can enable the shortages that caused demand pull problems to be met leading to this demand causing growth and real income increases rather than inflation
Plus if productivity of workers increases faster than their wages then the cost per unit of output falls for the firm enabling them to pass on saving to customers especially if market is competitive and demand is price elastic

Question 21

Evaluation of deflationary effects of increased productivity

Answer 21

If economy starts with negative output gap then these effects will not occur and there will be little to no beneficial deflationary effects

Question 22

Effects of increased productivity on improvements in trade position

Answer 22

Productivity increases should enable a firm to reduce their unit labour costs if they do not pass all of the improvements in productivity onto workers in higher wages - they could charge a lower price and be more internationally competitive - demand for our exports will increase and internal demand for imports will decrease as domestic goods will be cheaper
This could improve trade position , reduce trade deficit or increase surplus

Question 23

Evaluation of effects of increased productivity on improvements in trade

Answer 23

1) Producers may not pass on the unit labour cost reductions to lower prices particularly if their demand is price inelastic- higher profits
2) Depends in exchange rate and other factors remaining constant
3) competitiveness of UK goods and services depends on RELATIVE UNIT LABOUR COSTS compared to our major trading partners - it is not enough to just achieve productivity growth - we have to increase at a faster rate than Luther countries to decrease relative unit costs

Question 24

Factors affecting long run productivity

Answer 24

1) Investment
2) Human Capital / skills, training and education
3) Less regulation and market flexibility

Question 25

Investment as a factor of long run productivity

Eval

Answer 25

Productivity of labour hugely affected by quantity& quality of capital stock - as fines spend money on either researching new methods ( innovation) or developing the efficiency of their existing methods productivity will rise

Quality and effectiveness of investment matter not just value

Question 26

Supply side policy remedies for investment to increase productivity

Answer 26

1) Cuts in corporation tax
2) Grants to firms to subsidise their investment projects
3) Capital allowances which give firms tax relief on their investment projects so that they are corporation tax exempt
4) monetary policies to ease the flow of credit from banks to small and medium enterprises to help them get access to the funds that they need in order to invest
5) establishment of a new gov Business Bank to do direct gov loans to SMEs
6) improvements in infrastructure which have large positive externalities which benefit all other firms and enable them to be more efficient ( better transport, faster broadband, better telecommunications)
5)

Question 27

Human capital as a factor of productivity

Answer 27

Improvements in education attainment give workers more transferable skills enabling them to have a higher output per worker and to be more occupationally mobile so that they could avoid structural unemployment

Question 28

Supply side remedies for human capital to increase productivity
Eval

Answer 28

1) investment into education & improving healthcare
2) subsidies for training schemes & apprenticeships
3) subsidies for students and reduced feed on tuition
4) ensuring courses that are suitable for demands of modern economy are provided in tertiary sector

1) opportunity cost
2) fiscal deficit already v high
3) outcomes depends on motivation & natural talent of individuals not I just on provision
4) huge time lag

Question 29

Less regulation & market flexibility to increase productivity
Eval

Answer 29

1) Strong trade unions - collectively bargaining for wages for all workers reduces incentive to try harder for themselves + by making it more difficult to fire / reduce hours threat of punishment is removed
BUT staff may be motivated by better working conditions improving morale and productivity + staff can still get bonuses and promotions so will work hard
2) redundancy pay- costlier to hire/ fire staff
3)the less regulations and costs that are imposed on new firms the more dynamic and productive economy will be
4) competition acts as driver for innovation- improvements of efficiency BUT under many circumstances competition is impossible / impractical ( natural monopolies e.g. national grid needed to protect consumers) + monopolies can result in mass protection benefits known as economies of scale which make them cheaper & more efficient than numerous small scale competitive firms dog the same job
5) low levels of direct taxation - if workers get to keep more of their disposable income then leisure time becomes relatively more expensive in comparison to work and so they may choose to work harder + may encourage positive inflow of equality creators and less brain drain + reduce tax avoidance
BUT work incentive effects could also be negative as workers would have same income and work less + workers may be unable to work more hours if there is no demand for additional output
6) cutting welfare benefits reduces dependency and encouraged unemployed back into labour force to compete for jobs helping to raise productivity of workforce who would be more under threat of being replaced BUT cuts may make more people look for work but there are few jobs available it will just change type of unemployment + will hurt family members of this reliant on benefits
7) less gov spending as a share of GDP -less crowding out of investment BUT - Keynesian economists argue gov spending is essential and will crowd in investment and improve business confidence and multiplier effect + some gov spending is CAPITAL SPENDING and will dramatically improve LRAS

Question 30

General supply side policies

Answer 30

Restrict union powers
Remove/ restrict redundancy pay, such as probationary year at start of a contract within which it is easier to dismiss staff
Reduce number and cost of red tape in setting up business
Increase competition in markets through: increased trade liberalisation and removal of trade barriers, privatisation of nationalised industries
Income tax cuts
Reducing welfare benefits
Fiscal Austerity to keep size of fiscal deficit under control