Supply side policies [2.6.3] Flashcards
(11 cards)
What is the purpose of supply side economic policies?
Supply side policies focus on improving the structural long term performance of an economy
Supply side reforms can affect both short run and long run AS but focus on LRAS
What are the different approaches to supply side reforms?
Market led policies designed to make markets work better and give the private sector more freedom
State/ government intervention in markets to overcome different types of market failure
What are Market led supply side policies?
Policies focus on make markets work effectively, reducing influence of the state giving private sector more freedom. Boost role of market forces in resource allocation.
Cutting govt spending
Lower business taxes stimulate capital investment
Lower incomes taxes to improve work incentives
Reducing red tapes to cut the costs of doing business
Improving the flexibility of the labour market
Competition policies such as deregulation
Privatisation of state assets to private sector
Opening up an economy to overseas trade, investment and skilled labour migration
What are Government led supply side policies?
These are govt policies designed to improve efficiency and productivity.
State investment in public services and critical infrastructure
A commitment to a minimum wage and living wage improving work incentives
Higher taxes on wealth to fund merit and public goods
An active regional policy to inject extra demand into underperforming areas
Selective import controls to allow domestic industries to expand
Management of the exchange rate to improve competitiveness
Nationalism and or stronger regultions.
What is production?
Value of output of goods and services measured by GDP
What is productivity?
A measure of the efficiency of the FOP
Measure by output per person employed
Or output per person hour
Increased production does not mean increased productivity it depends on how many FOP been utilised.
Why does the UK struggle with productivity?
Financial clash between business struggle to borrow and be efficient
Uncertainty in investing different scenarios more or less opportunists
Lack of investment in gov and by private sector skill shortages.
What are the causes of the UK productivity gap?
Low rate of new capital investment in the UK
Banking crisis affecting leading to businesses
possible slowing rates of innovation
Persistent skill shortages in key industries
Relatively low levels of market competition
Low AD high spare capacity
What are the benefits of supply side policies?
An increase in a country’s productive potential causes outward shift in LRAS.
Short run supply increases because of a lower unit cost from increased productivity and efficiency.
Increase in productive potential allows economy to operate at higher AD level
What are the economic advantages of higher productivity?
Lower unit cost: Cost saving for businesses bring lower prices causes higher demand and more output in increase employment
Improved competitiveness and trade performance
Higher profits efficiency gains are a larger source of profits for companies.
Higher wage businesses can afford higher wages when workers are efficient
Economic growth through higher productivity then national output rises
What are the evaluations for supply side policies?
Supply side policies have long time lags especially when trying to achieve structural changes
The level of AD is important making business investment and innovation viable
Some policies might lead to greater inequalities of income and wealth
State intervention to pick winner in different industries is ineffective government failure
Sustainability issues if they aim to raise a country’s growth rate increasing externalities like pollution
