Ch 18 - Supply Side Policies

  • ^^Supply side policies^^ are government attempts to increase productivity and efficiency in the economy   * if successful, they will shift aggregate supply to the right and enable higher economic growth in the long run   * Supply side policies should increase productivity and shift long-run AS to the right

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  • ^^Free market SSP^^: policies which increase competitiveness and free-market efficiency   * lower income tax rates, reduced power of trade unions   * ^^Privatisation^^: set state owned assets to private sector, improves incentives   * ^^deregulation^^: allows new firms to enter the market open monopolies to competition   * ^^income tax cuts^^: greater incentives to work longer hours   * remove regulations: reduce power of trade unions, minimum wage and regulations   * free trade agreements: reduce tariff barriers and obstacle to trade   * reduce welfare benefits: increase incentive to get a job     * all these factors improve efficiency and competitiveness by extension

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  • ^^Interventionist SSP:^^ government intervention to overcome market failure   * higher government spending on transport, education, and communication   * government provides capital goods and services where it is believed that the market has failed to provide them.

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  • Benefits of SSP:

     1. Lower inflation: shifting AS to the right will cause a lower price level      * More efficient economy → SSP will reduce cost-push inflation      * Privatisation leads to more efficiency and lower prices

  1. Lower unemployment: SSP contributes to reducing structural, frictional, and real wage unemployment which reduces the rate of unemployment
  2. Improved economic growth: SSP will increase sustainable rate of economic growth by increasing LRAS, which enables higher rate of economic growth without causing inflation
  3. Improved trade + balance of payments:    * Firms export more when productivity increases    * Competition is important in an increasingly globalised marketplace

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  • In deregulation, competition tends to lead to lower prices + better quality of goods and services   * Difficulty: not all industries are amenable to competition. Privatising and deregulation these industries creates a private monopoly who can charge higher prices   * Lower income taxes increases incentive for people to work harder, leading to an increase in labour supply and more output. A cut in corporation tax gives firms more retained profit they can use for investment. (not always the case, incentive isn’t always increased and firms may choose to save profit)   * Labour markets can be regulated through policies such as:     * make it easier to hire/fire workers     * reduce maximum working hours and minimum holiday pay     * enable zero-hour contracts, which allow firms to employ workers when demand is greater     * flexible working hours decrease productivity

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  • ^^Interventionist SSP^^: policies which are based on the idea that the government has a fundamental role to play in actively encouraging growth   * Investment in human capital     * increases productivity through improving education, labour force and training     * education creates positive externalities   * Research and development     * economies need to study up-to-date with modern developments to develop new production techniques     * tax credit: could allow firms to not pay taxes from retained profit spent on R+D   * Provision and maintenance of infrastructure: defined as large scale capital provided by the government     * necessary for economic activity     * productive potential of an economy illustrated by LRAS will be imposed by a better infrastructure       * Direct support for businesses or enterprise

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  • Limitations for Interventionist SSP:   * significant monetary cost involved   * time lags before an outcome is produced   * depends on politics of the country   * supply SP are long run, but when implemented, some will have short run demand side effects

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  • Demand side theory: is built in the idea that economic growth is stimulated through demand   * main goal is to continue consumer spending on products → keep the economy afloat

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  • In market based supply policies, the reduction of household income taxes and corporate taxes will have expansionary fiscal effects   * In interventionist SSP, increased government spending increases AD in the economy and has expansionary fiscal effects

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