Supply-side policies Flashcards
Interventionist supply-side policies
Governments spending to overcome market failure e.g. building new roads to reduce congestion.
Market orientated supply-side policies
Policies to reduce regulation and allow free markets to function more efficiently e.g. reduce minimum wage.
Supply-side improvements
Several improvements in productivity of the economy for example: private innovation, improved technology or government supply-side policies.
Market orientated supply-side policies (Privatisation, Deregulation, Taxation)
Privatisation: More efficient as they have incentive and means to be, because they are profit-seeking thus they tend to lower cost and better services.
Deregulation: Reducing barriers of entry thus more firms can enter the market resulting in increased competition, in order to make the market share competitive.
Reduction in taxation: Reducing income and corporation tax, means that unemployed people have more of an incentive to work and stop using unemployment benefits.Thus, the quantity of labour increases which is an factor of production as result the productive capacity of an economy increase. The reduction in corporation tax means that profits keep more of their profit therefore, if firms have the incentive to invest capital then are able to.
Inflation target
In the UK, the government sets their inflation target at CPI = 2% +/- 1.
The Bank of England tries to meet this target
Household expenditure survey
Seeks to measure what household’s spend their money. From this we get a typical basket of the 1000 most popular goods and services, the basket of goods is updated each year to take into account changes in expenditure.
Weighting of different goods
The goods and services in the inflation index are given a weighting depending on what percentage of spending they generate.
For example: petrol may have a weighting of 5%, whereas bus travel a lower weighting of 0.4%.
Problems with calculating CPI
The expenditure survey does not include everybody, e.g. pensioners are excluded, but pensioners have different spending habits, e.g. heating is more important. Whereas, young people will benefit more from the falling prices of mobile phones.
Changes in quality of goods/services for instance: computers aren’t the same as they were 10 years ago thus it is difficult to compare price as they aren’t the same good.
Often housing isn’t taken into account.
It is impossible to measure all prices in the economy.
What is RPI?
Retail price index, is similar to CPI but includes more factors, but RPI includes cost of mortgages interest payments.
Benefits to consumers
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