Supply-side Policy Measures (Cambridge (CIE) IGCSE Economics)

Supply-side Policy Defined

• Supply-side policies aim to increase the total supply (productive potential) of the economy

  • This is achieved by increasing the quality or quantity of the factors of production

  • It can be represented by an outward shift of the productive possibility curve

  • More consumer goods and more capital goods can now be produced using all of the available resources

• The strategies used to increase total supply include education and training, labour market reforms, lower direct taxes, deregulation, improving incentives to work and invest, and privatisation

Supply-side Policy Measures

• When successful, supply-side policies have the following effects on the government's macroeconomic objectives

1. Economic growth: potential national output increases leading to higher real gross domestic product (rGDP)

2. Inflation: a greater supply in the economy results in reductions in the prices of goods/services leading to disinflation

3. Unemployment: this should fall as more workers are required to produce the higher levels of output

4. Current Account Balance: due to the increased supply, the prices of goods/services often decrease which makes them relatively more attractive to foreigners - so exports increase and the current account balance improves

5. Redistribution of income: this often worsens with the use of supply-side policies as wages fall and government tax revenue has fallen too
    

Specific Types of Supply-Side Policies

Strengths of supply-side policies

• They increase the rate of growth of an economy

• They reduce inflation

• They often reduce unemployment 

• They often increase the value of net exports as an increase in total supply usually results in lower prices leading to greater exports 

Weaknesses of supply-side policy

• The distribution of income worsens as labour market reforms and wage policies lower worker's wages

• They are expensive to implement

• There are significant time lags between government expenditure and seeing the benefits e.g. education and training often take a long time

• Due to the long-term nature, changes in government often result in changes to budgets and scope of projects

• Vested interests can result in less effective outcomes e.g. There are many examples of privatisation occurring in such a way that the government's preferred bidders obtained an asset at a knock down price