Policies to Generate Economic Growth (Cambridge (CIE) O Level Economics)
Revision Note
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 Tip
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 Tip
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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