Supply-Side Policies

– SUPPLY-SIDE POLICIES
 Supply-side policies are long-term strategies aimed at increasing the

productive capacity of the economy by using policies to improve the
quality and/or quantity of factors of production. This means that the
economy can produce more goods and services at all price levels. This can
be shown as an outward shift of the country's production possibility
curve and the long run aggregate supply curve. Examples of supply-
side policies include:
– SUPPLY-SIDE POLICIES -
PRIVATISATION
 Privatisation is the policy of selling off state-owned assets (such as
property or public-sector businesses) to the private sector, if they can be run
more efficiently. This is because private-sector firms are motivated by profit
and can, in theory, develop better products and deliver better services.
 Competition, productivity and efficiency are essential components of the
private sector, which help to boost the productive potential of the economy.
 For example, during the 1980s and 1990s, the UK government privatized
British Steel, British Petroleum, Rolls-Royce and British Airways. In Hong
Kong, the government privatized its rail services in October 2000.
– ACTIVITY
 Give an example of a privatised company or business in your country and
the result
– SUPPLY-SIDE POLICIES –
DEREGULATION
 Deregulation refers to the removal of barriers to entry, thereby making
markets more competitive. E.g., labour market reforms can make the labour
force more competitive and more productive. Such reforms involve the
removal of labour market imperfections, such as decreasing the power of trade
unions and reducing the national minimum wage.
 In the Republic of Ireland, the taxi industry was deregulated to allow for more
competition, leading to a dramatic increase in the number of taxis. In New
Zealand, postal services and the banking industry have been deregulated,
allowing for both domestic and foreign competition.
– SUPPLY-SIDE POLICIES – CAPITAL
INVESTMENT
 Some supply-side policies focus on the importance of investment in new
technologies, infrastructure and research and development (R&D), thus contributing
to the economic development of an economy. In the long run, capital investment
helps to increase the productive capacity and productivity of the economy.
 Expenditure on new technologies and R&D can help to generate new products for
consumption, such as smartphones, tablet computers and environmentally friendly
cars. On an international scale, innovation can also be a good source of competitive
advantage for a country.
 According to the IMF's World Economic Outlook, China's capital investment as a
proportion of its annual GDP is expected to average 47.25% between 2013 and
2016, whereas the rate for the USA is around 15%. This should, in theory, help
China's quest for continual and sustainable economic growth.
– SUPPLY-SIDE POLICIES – HUMAN CAPITAL
INVESTMENT
 Human capital is the collective knowledge, skills and experiences of a

country's workforce. Supply-side policies are used to improve the quantity
and/or quality of the workforce in the economy. These policies can be used to
create incentives to work.
 For example, government-funded retraining schemes can help the
unemployed to improve their chances of finding paid employment. Increased
government spending on education and training are further examples.
 Some countries spend a relatively large amount of their GDP on education,
such as Finland (6.4%), Sweden (7.7%), Denmark (8.5%) and Brunei
Darussalam (9.1%), whereas others, such as Botswana (2.2%) and Bangladesh
(2.4%), spend rather less.
– SUPPLY-SIDE POLICIES – HUMAN CAPITAL
INVESTMENT
– SUPPLY-SIDE POLICIES – TAX REFORMS AND
ENTERPRISE ZONES
Tax Reforms
 Lower taxes can create incentives for work, especially for people on low wage
rates. Over time, this can provide a boost to consumption. Tax cuts can also
encourage firms to invest in the economy, as they strive to maximise profits.
Enterprise zones
 These are areas with relatively high rates of unemployment where the
government creates financial incentives for firms to relocate.
 These incentives include tax rebates and reduced regulations in order to attract
private-sector investments. Enterprise zones are common in the UK, USA, China
and India.
ENTERPRISE ZONES
A newly established enterprise zone in Shenzhen City, China
 The main criticism of supply-side policies is the rime that it takes to

reap the benefits. E.g., it might take decades for a nation to enjoy the
benefits of an improved education system or better infrastructure in the
country.
ENTERPRISE ZONES
Cost of Loans to Exchange Business

Borrowing consumers rates investment
Tax Government
revenue Interest rates
spending
Monetary policy
Fiscal policy
GOVERNMENT
ECONOMIC POLICIES
Supply-side policy
Deregulation, tax reforms, Capital investment Training and

Privatisation
enterprise zones infrastructure, new education
technologies, R&D programmes for
- Government economic policies workers
– THE MERITS OF SUPPLY-SIDE
POLICIES
 The advantages of using supply-side policies to achieve economic stability
include:
• Improved economic growth - Supply-side policies can be used to achieve
sustainable economic growth by increasing the productive capacity of the
economy.
• Lower inflation - As supply-side policies increase the productive potential of
the economy, they help to prevent the general price level from rising beyond
control.
• Lower unemployment - An increase in the economy's productive capacity
will tend to increase national output, thereby creating jobs in the economy in
the long term. Also, supply-side policies can help to reduce both frictional
and structural unemployment.
• Improved balance of payments - Since supply-side policies can improve
productivity and national output without increasing the general price level,
the international competitiveness of the country should improve. E.g., firms
should become more productive and competitive, which will help to boost the
economy's export earnings. Therefore, supply-side policies tend to improve a
country's balance of payments.
– SUPPLY-SIDE POLICIES -
QUESTIONS
Exam practice
1. Define the term 'supply-side policies'. (2)
2. Examine how supply-side policies can help to achieve any two macroeconomic
objectives. (6)
Chapter review questions

1. What is fiscal policy?
2. What is the difference between a budget deficit and a budget surplus?
3. What are the differences between expansionary and contractionary fiscal policy?
4. Why might a government choose to use fiscal policy?
5. What is monetary policy?
6. Explain the differences between expansionary and contractionary monetary
policy.
7. Why might a government choose to use monetary policy?
8. What are supply-side policies?
9. Why might a government choose to use supply-side policies?
10. What are the limitations of using fiscal, monetary and supply-side policies to
control economic activity?

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– SUPPLY-SIDE POLICIES

 Supply-side policies are long-term strategies aimed at increasing the

 Human capital is the collective knowledge, skills and experiences of a

A newly established enterprise zone in Shenzhen City, China

 The main criticism of supply-side policies is the rime that it takes to

Cost of Loans to Exchange Business

Deregulation, tax reforms, Capital investment Training and

Chapter review questions

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