Demand And Supply Side Policies Flashcards
Supply side policies overview
Aim: increase productive potential of economy
How: increase quality/ quantity of FOPs or increase efficiency of markets
Interventionist of free market
Increase YFE and decrease cost push inflation
All 4 macro economic goals targeted
Supply side policies
MAKE LIFE EPIC
L- labour markets: education/ training + decrease Y Tax/ trade union power
I- industry: decrease corporate tax + increase subsidy to R+D
F- free market: privatisation/ deregulation
Efficiency
Productivity
Incentives
Competition
Supply side policies
Overview evaluation
\:) All macro objectives Stimulated AD/AS Sustainable non inflationary LR once economy has recovered it is still better off
\:( V. Expensive: opp cost Time lag No guarantee Ineffective w/ large amounts of spare capacity
Depends on…
Initial level of economic activity
Below YFE/ recession : stimulate AD and not AS
Policies to increase
Economic growth
SR- demand side policies
But… demand pull inflation
LR- supply side policies
But… time/cost/ no guarantee/ depends on initial level of economy
Interventionist supply side policies
I in human capital: education/ training/ health increase skills/ productivity = stimulate AD/SRAS
I in new technology:
R+D increase AD( increase in G) /SRAS productive capacity enriched
I in infrastructure:
Increase G = increase AD (SR) + expand capital base LR
E.g. Ports easier to X-M
Industrial policies:
Financial incentives and gov support=
Decrease tax/ incense sub =
Decrease cost of production =
Increase production
Protection of infant industries:
Protective tariffs/ quotas to keep foreign competition out until firms grow
Investment in human capital evaluation
:)
Education empowers
Job training eases adjustment to structurally unemployed
Healthcare improve standard of living + productivity
X costs + lack of info
Invest in new technology evaluation
:)
Developed countries
Imperfect info/ lack of $ until R+D is done –> need gov intervention
E.g malaria: costly but +ve E/ internet
:(
COSTS
Investment in infrastructure
:)
Public merit good no longer under provisioned
:(
Costs
Enormous expenditure
–> corruption/waste
Industrial polices
:)
Japan and Korea post WW2 decreased tax and increase sub
:(
Entrenched corporate interest who see national support as a corporate right
Complacent industries + uncompetiveness
Interventionist supply side policies overview
Gov led attempts to increase productive capacity of country
I in HUMAN CAPITAL NEW TECHNOLOGY INFRASTRUCTURE INDUSTRIAL POLICIES
MARKET BASED SUPPLY SIDE POLICIES OVERVIEW
Intended to decrease gov intervention Free market to increase efficiency and incentives Policies to encourage COMPETITION LABOUR market reforms INCENTIVES policies
Market based supply side policies
INCREASE COMPETITION: Deregulation- decrease cost of production Anti-monopoly- increase supply = decrease supply Privatisation: good incentives Free trade LABOUR REFORMS decrease trade union power Decrease unemployment benefits --> incentive No min wage --> no surplus unE INCENTIVE POLICIES decrease corporate tax = Increase production/ supply Decrease tax on capital gains= Increase investment Decrease Y tax--> LAFFER CURVE
Competition
Evaluation
:)
Post WW2: US/UK
increase consumer choice and better value for C
:(
Corruption
Very valuable national assets are auctioned off =
Monopoly
No desire to change or increase production
LABOUR REFORMS EVALUATION
\:) Flexible/ responsive LF \:( Unsafe products/workplace/polluted environment/ vulnerable workers dependent on employers= exploited --> trade unions help protect
Decrease in unE benefits = workers take whatever job they can get/ they don’t have time to find the appropriate one
INCENTIVE RELATED
EVALUATION
:)
Countries with high rates of tax yield more R by decreasing rates and increased
Growth
:(
Redistribute tax burden to the poor decrease in unemployment benefits/
Union power = lower living standard
LAFFER CURVE: need to show its reality –> little evidence to support that lower tax rates increase tax R
