Macroeconomic pack 4 supply side policies Flashcards
Supply-side policies
Policies undertaken by the government designed to increase the productive potential of the economy and long-run AS
They aim to increase the long-term growth potential in the economy and the full employment level of output
2 generic ways in which long term AS increase
- An increase in the quantity of factors of production (land, labour, capital and enterprise)
- An increase in the quality or efficiency of factors of production
Market-based policies
Policies that rely on allowing markets to work more freely and provide incentives for enterprise and initiative. The role of the government is limited in these policies - more right wing
Interventionist supply-side policies
Policies in which the Government intervenes to boost long-run aggregate supply - more left wing
Examples of market-based policies (4)
- Reducing corporation tax
- Reducing income tax
- Reducing unemployment benefits
- Encouraging free trade
Examples of interventionist policies (4)
- Government spending on education
- Government spending on healthcare
- Government spending on infrastructure
- Policies to improve labour mobility
How does reducing corporation tax increase incentive
Market based policy
Companies should have more profits after tax so more incentive to invest as more profits are retained. Means more people become part of the workforce. This means a boost to the amount of capital goods, which can produce more goods and services, hence higher productive potential and LRAS
How does reducing income tax increase incentive
Market based policy
This gives people more incentive to work as the reward for working has increased. This means more people are becoming part of the workforce (boosting quantity of labour) and therefore are able to produce more goods and services, hence higher productive potential and LRAS
How does reducing unemployment benefits increase incentive
Market based policy
There is less reward for being unemployed, incentivising people to work. Means more people are joining the workforce (boosting quantity of labour) therefore able to produce more goods and services, hence higher productive potential and LRAS
How does privatisation promote competition
Market based policy
By transferring ownership from the state to the private sector firms are now driven by the profit motive. Therefore they improve their economic efficiency to make higher profit. higher efficiency means more goods and services can be made with current resources, hence boosting productive potential and LRAS
How does deregulation promote competition
Market based policy
Removes barriers to entry and promotes growth of small firms to increase competition in industries, and hence efficiency, so boosts productive potential and LRAS
How does increased spending on infrastructure boost LRAS
Interventionist policy
Should help businesses operate more efficiently (eg. better internet connection, quicker deliveries by road). So more goods and services can be produced, boosting LRAS and productive potential.
How does stricter competition policy promote competition
Interventionist policy
Eg. Firms may be fined if they collude or mergers may not be allowed if they significantly reduce competition. Competition policy should lead to more competition in markets and therefore greater economic efficiency meaning more goods and services can be made with current resources, hence boosting productive potential and LRAS
How does increased spending on education, training and healthcare improve quality of labor force
Interventionist policy
More skilled and healthy workforce as they are being trained from a young age, boosting the quality of labour and their productivity. Therefore more goods and services can be produced from the same workforce, hence boosting productive potential and LRAS
How does promoting the private sector in education and healthcare improve quality of labour
Market-based policy
Could be done by contracting out the building of a hospital into the private sector rather than being funded by the government. Improves the efficiency of provision as well as increasing quality of the workforce and LRAS
How can policies to improve labour market flexibility reform labour markets
Market-based policy
Reduce the barriers of employing workers and therefore increasing size of the workforce. Lead to higher LRAS and potential growth eg. making it easier to hire and fire people - more likely to take risks of hiring worker
How would reducing the national minimum wage and trade union powers reform the labour market
Market-based policy
A higher national minimum wage may lead to real-wage unemployment. By reducing both of this wages should fall, as should unemployment as firms can afford to pay more workers. Therefore the quantity of labour in the economy should increase, hence boosting productive potential and LRAS.
Policies to improve labour mobility to reform the labour market
Interventionist policy
The government could intervene to help workers move to places where more jobs exist or help them switch jobs. This will boost the size of the workforce, meaning more goods and services can be produced and therefore a higher productive potential and LRAS
Strengths of supply side policy
- Meeting macroeconomic objectives simultaneously: ie. achieving higher economic growth/ greater employment/ lower inflationary pressure/ more internationally competitive
- Long-term macroeconomic management: these policies are designed to improve the economy over the long-term
- Less reliance on short-term economic data: supply side policies do not require a precise forecast of macroeconomic data
Evaluating supply-side policies (efficiency of LRAS)
- The impact on LRAS depends of the effectiveness of the policies eg. success of education depends on quality of teaching and whether appropriate skills are taught in order to boost productivity
Evaluating supply-side policies (time lags)
They are long-term policies - their effects on the long term growth trend, unemployment and the current account may take many years to be realised, can’t be implemented in the short run. This is difficult when elections take place every 5 years
Evaluating supply-side policies (negative side effects)
Eg. by lowering minimum wages and trade unions workers are more open to exploitation and may face lower wages and living standards
eg. spending on infrastructure will have budget implications such as the need to raise taxes or borrowings to fund projects
When the economy is suffering large increases in inflations how do demand side policies have a negative impact on AS
Raising taxes, cutting spendings and increasing interest rates (demand side policies) may have a negative impact on AS.
Cuts in education db healthcare damage the quality of labour and AS
Increases in income tax will reduce the incentive to work and reduce AS
Increases in corporation tax will reduce the profits available for investment, reducing AS
Raising interest rates will increase the cost of borrowing and increases the incentive to save. therefore business investment and AS may fall
