Download - Supply Side policies
Supply Side policies
Supply side policies aim to…
• Improve the efficiency of factor markets, to boost productivity and hence the overall capacity of the economy
• shifting long run aggregate supply (LRAS) to the right
• and pushing out the PPF
Education….
Training
Immigration
Improved technology
Percentage of GDPGross Domestic Expenditure on R and D
United Kingdom Germany
EU-25 Finland
Source: Reuters EcoWin
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
1.50
1.75
2.00
2.25
2.50
2.75
3.00
3.25
3.50
% o
f GD
P
1.50
1.75
2.00
2.25
2.50
2.75
3.00
3.25
3.50
What can Supply side policies involve?
Labour Market Reforms
• Reforms to employment laws• Increased investment in education and
training• Reforms to the tax and benefit system• flexible employment contracts• Flexible pay arrangements
– Performance-related pay– Share options schemes– Incentives for employer-based training
Supply side policies aim to…• Improve incentives for people to search for and find
work
• Increase the occupational and geographical mobility of labour
• Increase the productivity of labour
• Increase I and R&D spending by firms.
• Stimulate FDI
• Increase competition in markets
Benefits of supply side policies…
• Lower Inflation.Shifting AS to the right will cause a lower price level. By making the economy more efficient supply side policies will help reduce cost push inflation
• Lower Unemployment
• Improved economic growthSupply side policies will increase economic growth by increasing AS
• Improved trade and Balance of Payments. • By making firms more competitive they will be able to export
more.
Draw an AD/AS diagram• Show an outward shift in LRAS
• What impact does it have on price stability?
• What impact does it have on employment?
• What impact does it have on economic growth?
Does an increase in Investment guarantee an increase in
employment?
Problems with supply side…
• Supply side economics is a LONG TERM policy
• Its takes TIME – to improve literacy and education and for it to have an impact!
Problems with supply side policies
• Job insecurity -
• Access to state benefits fallen, inequality has increased in UK over past 20 years and supply side policies have played a part in this.
• An increase in AS is not good if there is not an increase in AD.
The importance of supply-side policies
More productivity - better living
standards
Allows the economy to grow without inflation
More competition - lower prices –
gains in welfare
Makes the UK more competitive in global markets
Increased tax revenues to fund state spending
Provides the platform for long
term growth
Importance of Supply Side Policy
Question 1
• Which one of the following is an example of fiscal policy? A decision by the government to
• A decrease the exchange rate.• B raise the minimum wage.• C increase its budget surplus.• D reduce the rate of interest.
C
Question 2• A current account deficit on the UK’s balance of
payments means that generally• A the total value of imports exceeds the total
value of exports.• B government expenditure exceeds government
revenue.• C the value of imports of services is less than
the value of exports of services.• D the volume of imports of goods and services
exceeds the volume of exports of goods• and services.
a
Question 3• The economy is in equilibrium at Y1. In order to move
the economy to Y2, a government• should increase• A the exchange rate.• B interest rates.• C expenditure on education and training.• D the level of taxation on business. C
Question 4
• In the short run, an increase in the government’s budget deficit is most likely to reduce
• A imports.• B unemployment.• C interest rates.• D inflation.
B
Question 5
• A large rise in interest rates is most likely to lead to an increase in
• A national output.• B investment.• C unemployment.• D consumption.
C
Question 6
• Which one of the following is most likely to cause a fall in aggregate consumer spending?
• A An increase in house prices• B A reduction in interest rates• C A rise in real national income• D A reduction in government spending on
welfare benefits
D
Homework• Evaluate two Economic Policies of the
Government of Kazakhstan to achieve growth and stability.
• 12 Marks