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
Gross Domestic Expenditure on R and D
% of GDP
Percentage of GDP
3.50
3.50
3.25
3.25
3.00
3.00
2.75
2.75
2.50
2.50
2.25
2.25
2.00
2.00
1.75
1.75
1.50
1.50
90
91
92
93
94
95
United Kingdom
Germany
96
97
98
99
00
01
02
03
04
05
06
EU-25
Finland
Source: Reuters EcoWin
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 growth
Supply 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 supplyside policies
Provides the
platform for long
term growth
More productivity
- better living
standards
Allows the
economy to grow
without inflation
Importance of Supply Side Policy
More competition lower prices –
gains in welfare
Makes the UK
more competitive
in global markets
Increased tax
revenues to fund
state spending
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