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