Supply Side Policy Flashcards
Supply Side Policy (Def + Objectives)
Government policy which aims to increase productivity and increase efficiency in the economy, ie. stimulating supply-side improvements in the economy.
Objectives -
Increase potential output of the economy (capacity)
Increase trend rate of growth
Change personal incentives
Market Based Supply Side Policy - Definition + Examples
Policies which alleviate the economy of aspects of Govt. intervention.
Privatisation
Deregulation
Income Tax Cuts
Flexible Labour Market - reduce TU presence
Reduce welfare benefits
Free trade Agreements
Interventionist Supply Side Policy - Definition + Example
Policies which increase the level of Govt. intervention into the economy.
Public Sector Investment - Infrastructure
Education spending
Training / retraining programmes
Increase housing supply
Health spending
Natural Rate of Unemployment (NRU)
The rate of unemployment at which the economy is considered to be at ‘full employment’/ all FoPs are being fully utilised.
Successful SS policy can reduce the NRU
NAIRU
Non-Accelerating Inflation Rate of Unemployment
Meaning the lowest level of unemployment before inflation increases - demonstrated on the LRPC
Voluntary Unemployment
Those who are able to work but choose not to at the current wage rate.
Affect of SS Policy on TIGER indicators
Trade Balance - Improve - British exports become cheaper (lower prod. costs) increasing the demand.
Inflation - Reduces CP Inflation - Increased spare capacity
Growth - Increase - Increased capacity leads to a greater output resulting in a greater national income (rGDP)
Employment - Increase - Increased labour demand derived from increased AD.
Success of SS policy depends on
Time Lag
Demand-pull inflation - LRAS growth < AD Growth ?
Govt. Budget - Deficit / Opportunity Cost ?
Environmental Costs - Increased production / depletion
Deregulation - Exploitation of labour / environment ?
Targeted correctly - best use of Govt. budget ?
SS policies which affect micro markets
Incentives to invest - eg. tax cuts
Trade Liberalisation - eg. removing barriers to entry
Deregulation
Privatisation
Support / subsidies for small/ emerging businesses
SS policy which affect the labour market
Reduce unemployment benefits
Reduce /reform income tax
Improve education / training
Trade union reform
Deregulate labour requirements - eg. non wage costs.
Why do SS policies need parallel demand-side policy ?
SS policies increase the supply in the economy
This also requires a paralell increase in AD.
SS policies aid long-term economic growth
Demand-side policies provide short-term stability
How can SS + DS policies be used to resolve unemployment in the SR + LR ?
SR - Expansionary FP can lead to an increased level of derived demand for labour, however this does not reduce the NRU - meaning unemployment will likely return to pre-boost equilibrium level.
LR - SS policies can be used to increase the productive capacity in the economy and reduce the NRU. Eg. tax breaks promote firms to invest into capital resulting in a long-run reduction in the NRU.
Benefits of SS policy
Increase trend growth
Aids Macroeconomic objectives
Unemployment should fall
Falling cost-push inflation - greater efficiency
Increase Int. Comp. - improve current account position
How do SS policies improved the UK internationally ? - chains of analysis
SS policies increase the productivity / capacity of the economy - reducing the price of their exports - increased international competition - resulting in increased demand for UK exports - helping the UK Trade balance.
SS policies result in a more productive labourforce - increasing foreign investment - increasing the long-run trend rate of growth - resuling in further reductions in NRU - reduced levels of structural unemployment.
SS policies improve the productive capacity of the economy - this increases the LRAS - this can reduce positive output gaps - alleviating demand-pull inflation.
SS policies such as infrastructure spending increases factor mobility + reduced raw materials transportation costs - reduces costs of production - the average (unit) costs decrease - prices fall - reducing CP inflation.
