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Chapter_28_-_Supply_side_policies

Supply-side policies aim to increase aggregate supply and enhance productive potential through measures such as education and training, tax cuts, deregulation, and privatization. These policies can lead to economic growth, lower unemployment, and stable prices, but may also involve time lags and costs. Ultimately, effective supply-side policies can improve a country's balance of payments and competitiveness in the global market.

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41 views

Chapter_28_-_Supply_side_policies

Supply-side policies aim to increase aggregate supply and enhance productive potential through measures such as education and training, tax cuts, deregulation, and privatization. These policies can lead to economic growth, lower unemployment, and stable prices, but may also involve time lags and costs. Ultimately, effective supply-side policies can improve a country's balance of payments and competitiveness in the global market.

Uploaded by

Prisha Dang
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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CHAPTER 28 -

Supply Side
Policies
Sweedil Dsouza Mascarenhas
Learning objectives

 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
Supply side Policy - Meaning

 Supply-side policy measures are designed to


increase aggregate supply and hence increase
productive potential.

 Such policy measures seek to increase the quantity


and quality of resources, and raise the efficiency of
product and factor markets.
Supply side policy measures

 Improving education and training


 Cutting direct tax
 Improving incentives
 Deregulation
 Privatisation
 Labour market reforms
Improving education and training

Cost of
Firms are
Increase the production &
Productive able to sell
skills Quality of
more
goods
Improving education and training

 Education and training may not be in the right areas.

 Example, Teaching flower arrangement maybe less


useful than teaching Maths.

 Training people as taxi drivers will not be useful if


driverless cars are about to be used.
Lowering direct taxes

Increase the Unemployed people


Increase the labour
incentive/reward to start searching for
force
work work more actively
Lowering direct taxes

 Some workers may respond to lower income tax by working


fewer hours

 Increasing the incentive to work will not be effective if there


are not jobs available for the unemployed

 Cutting unemployment benefit may result in a fall in aggregate


demand and so output and employment.
Lowering corporate taxes

 Increase the incentive to invest – as firms are more willing and


able to invest.
 The greater willingness will come if they can keep more of the
profits they earn.
 The greater ability will come from the rise in funds they will have
to invest.
 If firms do not think they will be able to sell more goods and
services in the future, they will not want to expand, even with a
cut in corporation tax.
Deregulation

 Deregulation is the reduction, or elimination of rules and


regulations that have been enforced by laws.

 Aim is to remove barriers to entry to markets and to reduce


the costs of complying with the rules and regulations.

 It will also reduce the cost to the government of regulating


the industries and occupations affected
Deregulation

 Deregulation increases competition which may increase


efficiency and lower costs of production and prices.

 Does not guarantee that a monopoly will not develop.

 Imposing restrictions on who can undertake particular


occupations may also protect consumers.

Example, surgeons have to possess medical qualifications


Privatisation

• Privatisation seeks to increase competition and efficiency by


increasing the role of market forces.

• Industries in private sector have greater incentive to respond to


changes in consumer demand and to provide them with high
quality products at low prices.

• Either out of business or make high profits

• Privatisation will increase productive capacity, if private sector


firms invest more and work more efficiently than stateowned
enterprises
Privatisation

• May not ensure competition and may develop


monopoly over time

• Private sector firms do not take into account social costs


and social benefits

• More willing to make workers redundant


Labour market reforms

 Labour market reforms are designed to make labour


markets work more efficiently. The intention is to
increase the quality, quantity and flexibility of labour

 Measures are better training, removal of barriers to entry


(qualification), barriers to exit (Long contracts)
Labour market reforms

 Making it easier for employers to hire and fire


workers, is one way that some governments seek
to increase the efficiency of labour markets.

 This makes it easier for firms to adjust their supply


to changing market conditions.

 Another labour market reform is reform of trade


unions. This may make labour more productive.
Subsidies

 A government may provide subsidies to the firms


in particular industries to increase the
performance of markets
 Firms may also be subsidised to encourage them
to buy new capital equipment.
 Consideration would have to be given as to
whether this is the best use of government
spending
 There is the risk that the firms may become
dependent on the subsidies.
Effects of supply-side policy on
government macroeconomic aims
Low
unemplo
yment

Economic Stable
growth prices
Aims

Redistributio BOP
n of income
stability
Effects of supply-side policy on
government macroeconomic aims

• By increasing productive capacity of the


Economic economy
• Example, Investment in education and cut in
growth corporate tax

• Increase in the economy’s productive


Low capacity will increase national output,
thereby creating jobs
unemployment • Investment in training helps to reduce
unemployment
Effects of supply-side policy on
government macroeconomic aims

Stable • Supply side policies increase the productive


potential of the economy, they prevent
general price level rising beyond control

prices • It helps to boost economic growth without


higher prices

BOP
• Since supply side policy can improve
productivity and output without increasing
general price level leading to better

stability international competitiveness


Effects of supply-side policy on
government macroeconomic aims

• Greater investment in
education and training along
with lower taxes benefit the
Redistribution low income group

of income
This ppt is for educational purpose
only

Effect of Supply-side policy on


government macroeconomic aims
 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. Producing better quality, and cheaper, products can increase exports
and reduce imports.

▪ In the case of some supply-side policy measures there is a time lag involved. For
example, it can take some time before the effects of improved education and
privatisation are experienced. In addition, some supply-side measures can be expensive.
This ppt is for educational purpose
only
Figure shows aggregate supply rising in line with aggregate demand.
Such a combination enables output and employment to increase
without inflation.

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