Supply side policies - Hwa Chong...
Transcript of Supply side policies - Hwa Chong...
DEFINITION : Supply side policies are long term measures intended to increase the productive capacity of the economy. This can be done through rapid technological advances, accumulation of capital stock, and continuous rise in labour productivity, which will shift the AS curve to the right.
The history of the long term supply side polices can be traced back to
the Singapore economic crisis years (majorly 2008~2009) where
Singapore undergoes harsh recession.
AD-AS graph illustrating the state of Singapore at 2009
In 2009 singapore encountered a recession and led to lots of firms to cut
the amount of workers they employ. This led to the national equilibrium
to be at the Keynesian range of the Supply curve as shown in the above
graph . During the recession AD decreased. so the aim was to move it
back to where it was. See graph below:
However when the recession was over and they had “recovered” in 2010
through inflationary growth, Singapore decided to focus more on AS
policies (such as increasing productivity and lowering firms costs) in
order for the country to be more resilient in the future and to make long
term goals to sustain the economic growth not at the cost of inflation
The graph above illustrates the aim of the government. Through shifting
AS curve outwards, we notice that the GPL will drop as the national
income still increases. We also noticed that long term supply policies
will not work during recession as the equilibrium is at the Keynesian
range and no matter how we shift the AS curve outwards, there wouldn’t
be any effect. Hence Supply side polices are an extension from the
demand side polices to promote economic growth.
A good illustration in general would be a graph like this
Measures:
1. Increase general education level and skills of workers.If the
government invests more in education, then the workforce will be
more skilled. This will raise personal output and therefore
aggregate supply.
2. government supports help to those with lower incomes and
universal increases in training and education that will hopefully
help to increase output and therefore the welfare of all people.
3. government would need to find a way to compensate workers (tax
cuts, etc.) to make workers feel more willing to work harder and
achieve higher output.
Other than measures targeted at increasing labour productivity (i.e.
through promoting quality education; and constant training &
upgrading of the workforce), supply side policies would also include
those targeted at increasing investment (including inflow of foreign
direct investment), encouraging entrepreneurship; and encouraging
technological advancement (i.e. R&D). Govt spending on infrastructure
for the economy (e.g. highways, transport and communication
networks) is also part of supply side policies.
However in general In the short run, supply side policies are almost
ineffective because firms are simply producing more. It will take time
for aggregate demand to increase though, so it is not until the LR that
these supply side policies will be affective.
MCQs
1. Why is the long-term supply side policy favoured now instead of
during the recession?
(A) Singapore did not have enough resources back then
(B) Singapore had not reach near full-employment at that time
(C) Singapore can’t afford to pump money into this back then.
(D) The policy’s disastrous and will cause more harm than good
2. Since the economy is already starting to recover in 2010, why is
this policy necessary?
(A) Singapore wish to achieve a faster and more rapid growth
(B) Singapore did so to tackle the problem of high inflation
(C) The government is trying to increase their earnings
(D) Singapore made a wrong decision
3. Which of the following could be part of the government’s
measures in the policy ?
(A) Encourage savings of people(more saving, more supply)
(B) Increase the GPL ( price high, nobody buy. More supply)
(C) Reduce the population(Less demand, more supply)
(D) Increase Wages of workers ( More output, more supply)
ANS : 1. B 2. B 3. D