Impact of Supply Side Policies
The benefits of supply side policies far outweigh the negatives; however, they often take many years (up to 20 in some cases) to fully develop
Therefore, many economies fail to develop their supply side policies because of political change and an associated change in government priorities
When successful, supply side policies have the following effects on the government's macroeconomic objectives
Impact of supply side policies on macroeconomic objectives
Macroeconomic Objective | Impact |
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Economic growth | Supply side policies increase the rate of growth of an economy Deregulation or privatisation. encourages new firms to enter the market, which stimulates economic growth Spending on infrastructure projects or education and training increases potential national output, leading to higher real gross domestic product (rGDP)
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Low and stable inflation | Supply side policies reduce inflation as lower taxes, privatisation or deregulation can reduce the cost of production There is also a greater supply in the economy, which results in reductions in the prices of goods and services, leading to disinflation and making the exports of the nation more competitive
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Low unemployment | |
Stable current account on balance of payments | Supply side policies often increase the value of net exports Due to the increased supply, the prices of goods and services often decrease, which makes them relatively more attractive to foreigners, so exports increase
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Environmental protection | Large infrastructure projects and transport projects almost always have some negative externalities associated with their creation E.g. Building a dam in a gorge to create a hydro electric station damages the natural environment and ecosystem
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The redistribution of income | The distribution of income may worsen as deregulation offers less protection against low wage employment Reducing taxes results in less government tax revenue and unemployment benefits, leading to a decrease in income redistribution
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