Policies to Generate Economic Growth (Cambridge (CIE) IGCSE Economics)

Revision Note

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

Demand-side Policies

  • Demand-side policies aim to influence the total demand in an economy

  • The two demand-side policies are fiscal policy and monetary policy

  • Any policy that increases consumption, investment, government spending or net exports is likely to cause an increase in real GDP
      

Examples of Specific Types of Fiscal Policy Used To Boost Growth

Example

Explanation

Many taxes on imports (import tariffs) are eliminated

Costs of production for firms are reduced and they can produce more goods/services at lower prices - which will increase total demand

Subsidies are provided to manufacturers of electric cars

Car manufacturers are able to produce their cars more cheaply and sell them at lower prices - which will increase total demand

A government increases the level of unemployment benefits

Unemployed workers have more income available and increase their consumption - which will increase total demand

A government creates a free port zone

Both multi-national and domestic companies are incentivised by the low/no tax promise and seek to invest in free port zones - which will increase total demand

A government announces that it will build 14 new schools in the next financial year

Building companies have to be employed and building materials consumed which is all paid for by the government - and will increase total demand

Examples of Specific Types of Monetary Policy Used To Boost Growth

Example

Explanation

The housing market is subdued and so the Central Bank lowers interest rates by 1%

With cheaper loans now available, house buyers demand more loans to purchase properties and to renovate/furnish the properties - consumption increases and total demand increases

The Central Bank intervenes in the exchange rate to depreciate it

The nation's currency is now cheaper for foreigners to purchase and this boosts exports, which will increase total demand

The Central Bank commits to a new Quantitative Easing program of $75bn a month

Commercial banks, firms and private investors receive this money as the government purchases their bonds - they use some of it to invest and consume resulting in greater total demand

  •  An evaluation of the pros and cons of fiscal/monetary policy is developed in Topic 4.3 and Topic 4.4

Examiner Tips and Tricks

When evaluating any demand-side policy, avoid generalisations and focus on the effects of the specific policy mentioned. To strengthen any response, fully develop how each policy will increase total demand as this is part of your 'chain of analysis'. Always conclude by explaining the different elements of GDP (C + I + G + X - M), inflation and output (real GDP)

Supply-side Policies

  • Supply-side policies aim to influence the total supply in an economy

 
Examples of Specific Types of Supply-Side Policy Used To Boost Growth

Example

Explanation

The Government reduces the level of welfare benefits

People who rely on benefits for survival are more likely to make themselves available for work. With more workers in the economy there can be a higher level of output and economic growth

The Government launches a new 'Education and Training' fund to help fund University students studying artificial intelligence (AI)

This provides a pool of skilled labour in AI and helps to grow a new industry resulting in greater national output and economic growth

The Government decides to remove quotas on all imports

The removal of this protection lowers prices and encourages more competition leading to higher output and economic growth

The Government decides to build an additional  runway at the national airport

An additional runway means that more planes can land which generates more economic activity (e.g. transport of goods/services) leading to higher output and economic growth

  •  An evaluation of the pros and cons of supply-side policy is developed in Topic 4.5

Examiner Tips and Tricks

Supply-side policies can be difficult to identify. This is because many supply-side policies are a fiscal policy in the short term but a supply-side policy in the long term. In the example above, building a new runway requires government spending in the short term (fiscal policy) as the government hires firms, workers and buys the necessary materials. However, when it is finished, it increases the supply of runways to the economy which in turns increases the economic activity - the potential output of the economy has expanded and it is a long term supply-side policy.

In your exams, when deciding if a specific policy is fiscal or supply-side, determine whether the government is using it with the intention of increasing total demand or total supply.

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Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

Jenna Quinn

Author: Jenna Quinn

Expertise: Head of New Subjects

Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.