Supply side policy's

Question 1

Production

Answer 1

• The value of goods and services e.g. measured by GDP or an index of production in specific industry

Question 2

Productivity

Answer 2

• A measure of the efficiency of factors of production
• Measured by output per person employed
• Or output per person per hour

Question 3

Supply side policies aim to increase LRAS

Answer 3

• Improvement in the quantity and/or quality of factors of production
  > Labour
  > Capital
  > Land
  > Enterprise

Question 4

Supply side policies aim to increase LRAS (Diagram)

Answer 4

• An increase in a country productive potential causes an outward shift of LRAS.
• An increase in productive potential allows an economy to operate at a higher level of AD without upward pressure on price levels

Question 5

The difference between Supply side policies and Supply side improvements

Answer 5

• Supply side improvements often originate in the private sector, independently of government
• Supply side policies mainly work through their individual markets and so are microeconomics origin

Question 6

Economic effects of Supply side policies

Answer 6

• Lower unemployment
  > Higher output
  > Incentives to work
  > Disincentives not to work
  > Skills - labor mobility
  > Infrastructure
• Lower inflation
  > Increase in AD will not put pressure on prices
  > Less trade union pressure on wages
  > Declining monopolistic powers
• Balance of payments
  > UK exports more price competitive
  > UK exports more cost competitive
  > Quality of exports

Question 7

Why isn’t all government policy and expenditure focused on supply-side

Answer 7

• They will take a long time
  > Short term vs long term benefits
  > Political (5 years in office)
• One big trade off
• Risk that private sector will not respond
• Effectiveness
• Is it investment or just replacement

Question 8

Supply side economic policies

Answer 8

• There are policies that improve productive potential/ capacity of an economy
• Supply side policies focus on improving the structural long term performance of an economy
• Different approaches to supply side reforms
  > Market led policies - designed to make markets work better and give the private sector more freedom
  > Government intervention in markets to overcome different types of market failure
  -Supply side reforms can affect both short run and long run AS - but focus is usually on LRAS
• Time lags involved with supply side reforms can be long

Question 9

Key structural challenges for the UK economy

Answer 9

• Persistent productivity gap
• Shrinking labor force
• Low trend growth rate of real GDP
• Rise of emerging nations
• Deep widening regional economic divide
• Structural trade defect (current amount of BoP)
• Low capital investment and research
• Rising inequality

Question 10

Private sector Supply side policies

Answer 10

• These policies focus on reducing the size of the state and in boosting the role of market forces in allocating scarce resources
• Focus on the labor market - quantity and quality of labor
  > Lower income taxes to improve work incentives
  > Improving the flexibility of the labor market
  –> Reform employment laws - holiday pay, sick pay, maternity, employee protection
  –> Encourage more part time work
  –> Reduce trade union power
  –> Abolish minimum wage and encourage zero hour contracts
  –> Opening up an economy to inward skilled labor migration
  > Reduction in welfare benefits - poverty, inequality
• Productivity and investment
  > Reduce corporation tax
  > Reducing red tape to cut the costs of doing and entrepreneurship
  > Competitive policies such as deregulation and anti cartel laws
  > Privatization of assets - transferred to the private sector
  > Opening up an economy to overseas trade and investment

Question 11

Laffer curve

Answer 11

• Reductions in rates of income tax towards equilibrium point will increase tax revenues because they increase incentives to work

Question 12

Government intervention

Answer 12

• Supporters argue that an interventionist state can have a powerful positive long term effect on supply side performance
• State investment in public services and critical infrastructure
• A commitment to a minimum wage to improve work incentives & productivity in the labor market
• Higher taxes on wealthy to fund public and merit goods
• An active regional policy
  > Inject extra demand into under performing areas
  > Invest in regions of persistently high unemployment or low per capita income
• Selective import controls to allow domestic industries to expand
• Management of the exchange rate to improve competitiveness
• Nationalism of and/or stronger regulation of key industries

Question 13

UK government supply side policies

Answer 13

• Deregulation of markets
• Leveling up
• Apprenticeship levy
• Universal credit reform
• Full expensing
• Reduction in national income
• Enterprise zones
• Industrial plan

Question 14

Evaluating Supply side policies

Answer 14

• Supply side policies can have a powerful effect on economies performance
  1. Supply side policies have long time lags - especially when they are trying to achieve structural change
  2. The level of AD is also important in making business investment and innovation viable
  3. Supply side policies might lead to greater inequalities of income and wealth
  4. Sate intervention to “pick winners” in different industries might be ineffective - there are risks of government failure
  5. Sustainability issues if policies aim to raise a country long term growth rate - leading to increased externalities such as pollution
  6. Supply side policies look to achieve relative improvements to improve competitiveness - but other countries may be making gains too