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Supply side policies - IB Economics

  2. SUPPLY – SIDE POLICIES CPS GLOBAL SCHOOL - IB ECONOMICS - MONICA  Supply – side policies are combination of government-led and free market policies designed to increase the productive capacity of the country.  Beyond 1980s, new perspective emphasis on Money and inflation control (Monetarist approach). Emphasis on the SUPPLY SIDE.  Appeal -> improve overall macroecon obj. Good policies encourage productivity creating more/ better factors of pdn.  Productive surplus – growth is the logical outcome .  Increasing LRAS manages to increase the economy without generating inflation. Drawback on the demand-side.  Answer on of the most serious challenge of macroecon policies -> STAGFLATION - is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains
  3. CPS GLOBAL SCHOOL - IB ECONOMICS - MONICA  Stagflation .  Movement of AD -> Expansion -> Further inc PL Contractionary -> Further Recession  Successful supply- side policies shift SRAS to the right easing PL and encouraging recovery to full employment. LRA S
  4. Types of supply – side policies CPS GLOBAL SCHOOL - IB ECONOMICS - MONICA  SS policies shift LRAS to the right increasing overall productive capacity of the economy. More o/p . Higher std of living and more empl.  Types -> Govt based and Market-based  Govt intervention -> provide capital G/S where it believes the market has failed to do so.  Market based -> unleash full power of open markets to improve competition, open labor markets, and create better incentives.
  5. Market based supply – side policies: CPS GLOBAL SCHOOL - IB ECONOMICS - MONICA  Origin: Milton Friedman - thought about Sm -> NEO Classical economics -> fiercely criticized heavy regulation of markets. Govt ownership of major industries and protectionist policies.  Intended to reduce govt intervention allowing free mkt to increase efficiency and improve incentives.  Aimed to open up competition, free up mkts from govt involvement and return influence to the pvt sector.  US and UK politicians -> decisive and unpopular stances privatized and shrank big industries – increased strike and unemp.
  6. Types of market based supply – side policy CPS GLOBAL SCHOOL - IB ECONOMICS - MONICA  Policies to encourage competition.  Labor market reforms  Incentive related policies.
  7. Policies to Encourage Competition CPS GLOBAL SCHOOL - IB ECONOMICS - MONICA  Open mkt for greater competition. More competition – harder work – innovation – lower prices – better quality – earn money and win customers. 1. Deregulation: reduce bureaucracy and costs of complying with govt rules esp those with regard to negative externality and pdt quality/ quantity, worker safety and pollution control. 2. Anti – monopoly regulation: anti – trust laws. Prevent / dismantle monopolies . More flexibility in o/p and prices. 3. Privatization: lower costs and prices. Regulation -> unnecessary empl and inefficient. 4. Trade liberalization -> applied free-trade . Oppose tariffs, quotas and subsidies tht encouraged depend on govt. encourage redn of trade barriers and open competition.
  8. Labor market reforms CPS GLOBAL SCHOOL - IB ECONOMICS - MONICA 1. Reducing trade union power -> decrease wage setting power. More workers move freely. Increase empl. 2. Reducing unempl benefits -> smaller and shorter in duration encourage workers to seek employment 3. Ending the min wage -> price floor for labor . Surplus of worker. Higher wages reduces profits for firms. Lower supply and empl.
  9. Incentive related policies: CPS GLOBAL SCHOOL - IB ECONOMICS - MONICA  Reducing business tax and IT encourage pdtivity. 1. Reducing IT -> increase disposable income. Greater incentive to work. Arthur Laffer -> lower taxes at the high end of the tax rate raises tax revenues. lesser tax stimulate work resulting income increase tax revenue. 2. Reducing business and capital gains taxes -> cut costs. Produce more. Inc empl
  10. Interventionist supply side policies: CPS GLOBAL SCHOOL - IB ECONOMICS - MONICA  Require some kind of govt action to improve factors of pdn. Most require immediate spending which will stimulate AD. 1. Investment in Human capital 2. Investment in new technology 3. Investment in infrastructure 4. Industrial policies
  11. Investment in Human capital CPS GLOBAL SCHOOL - IB ECONOMICS - MONICA  Human capital – labor and entrepreneurship. 1. Education -> public good provided by the govt. learning rewarded with jumps in income of those so- educated. Improves skills and productivity. High national income. 2. Training -> job training centres established by the govt. productive employees and enhance economic growth. 3. Health services -> when public health is poor. Student and worker absenteeism. Improved Healthcare improve pdtivity. the above three have an immediate effect on AD . But, a lingering effect on the LRAS pushing it out by improving labor and Entrepreneurship.
  12. Investment in infrastructure CPS GLOBAL SCHOOL - IB ECONOMICS - MONICA  Building of large scale public projects – ports, highway systems, bridges, communication networks, power and water systems. Expand capital base and increase LRAS in the process.  Port – easier to import / export goods.
  13. Industrial policies CPS GLOBAL SCHOOL - IB ECONOMICS - MONICA  Govt support certain industries -> enable the country to gain an edge or has long term good prospects. 1. Financial incentives -> support with reduced taxes. Subsidized loans, direct subsidizes. Reduce costs. Improved pdn. 2. Protection for ‘infant industries’ -> industries potentially competitive. Too small to enjoy econ of scale. Govt protects thro tariff or quotas to keep foreign competition out till it is large and developed.