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Chapter 28 - Supply-side Policy - CIE IGCSE/O Level

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Published in: Economics
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Summary of Chapter 28 - Supply-side Policy of the CIE IGCSE & O Level coursebook.

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  1. ?l? 3a?s:K1ddns
  2. Learning Objectives Supply—side policy • define supply-side policy analyse supply-side policy measures (education and training, labour market reforms, lower • direct taxes, deregulation, improving incentives to work and invest, and privatisation) • discuss the effects of supply-side policy on government macroeconomic aims
  3. SUPPLY-SIDE POLICIES Supply-side policy measures are designed to increase aggregate supply and hence increase productive potential They increase productive potential by increasing the quantity and quality of resources, and raising the efficiency of product and factor markets These policy measures include improving education and training, cutting direct taxes and benefits, reforming trade unions and privatisation
  4. EXANPLES OF POLICIES Improved education & training The + educated & trained, the + efficient workers are going to be, meaning costs are reduced while quality increases. However, E&T must be in relevant areas Deregulatio The removal of rules and regulations erase entry barriers to work. However, can only be reasonable to some extent - think of an example where deregulation in a certain industry may be counter- Cut in direct These incentivize work a tåkes stment. However, if workers are statisfied with their current pay they may just choose to work fewer hours To pay interest on national debt productive Reforms The intention is to increase the quality, quantity and flexibility of labour. By privatising state-owned enterprises, govt can promote efficiency as the profit incentive will be present Subsidies A government may provide subsidies to the firms in particular industries for a number of reasons connected to increasing the performance of markets.
  5. SS POLICY AND THE RACRO AIRS • In the long run, all the government's macroeconomic aims have the potential to benefit from supply-side policy. Increasing aggregate supply enables an economy to continue to grow in a non-inflationary way. Increasing productive potential and efficiency can improve an economy's balance of payments position (greater qty and qly of products) However, impact from SSPs are likely only felt in the long-run Price level ADI AD 0 AD AS ADI Real GDP
  6. You should know... Supply-side policy measures are designed to increase aggregate supply. • Improved education and training can increase labour productivity and so the productive potential of the economy. Cutting income tax rates and unemployment benefits may be designed to make work more attractive to • living off benefits. Lowering corporation tax may increase investment. Deregulation and privatisation may increase competition and efficiency. • Labour market reforms may increase the efficiency of labour markets. Subsidies may allow small firms to grow and compete and may be used to encourage firms to invest. All government macroeconomic aims may be helped by supply-side policy measures in the long run. The effectiveness of macroeconomic policy measures can be increased by using a number of policies, • accurate information and an absence of a time lag.

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