<4.5 SUPPLY-SIDE POLICIES> 

• "Better trained teachers will deliver content more efficiently and produce more educated students."

• IMPROVING EDUCATION & TRAINING is designed to increase the skills of workers and hence INCREASE THE QUALITY OF LABOUR RESOURCES and If successful, this would MAKE WORKERS MORE PRODUCTIVE => LOWER COSTS OF PRODUCTION  => GREATER POTENTIAL OUTPUT.

• This lowering of costs, also makes the goods MORE COMPETITIVE ON FOREIGN MARKETS and CAN BOOST EXPORTS (X).

  • • • "What are the limitations?" Of course the SUBJECTS/SKILLS chosen to be provided are vitally important and must be FOCUSED ON GROWTH AREAS, such as AI, STEM etc... 

INCREASE THE QUANTITY OF LABOUR by...

• 1) REDUCING INCOME TAX RATES => INCREASE THE REWARD FOR WORKING => INCREASE IN THE QUANTITY OF LABOUR.

"Lower income tax, incentivises me to join the labour force"

• 2) REDUCING UNEMPLOYMENT BENEFIT => INCREASE INCENTIVE TO FIND WORK => INCREASE IN QUANTITY OF LABOUR.

"Lower benefits compel me to join the labour force"

• • • • "What are the limitations?" 

        • • Some WORKERS PREFER LEISURE and may respond to lower taxes by WORKING LESS and maintaining their incomes rather than try to earn more. 

          • The policy ASSUMES JOB OPPORTUNITIES EXIST in the first place, if not, then it is ineffective and damaging as less benefits are available for the needy.

INCREASE THE QUANTITY/QUALITY OF CAPITAL by...

• 1) REDUCING PROFITS TAX RATES => INCREASE THE REWARD FOR INVESTING => MORE WILLINGNESS & ABILITY TO REINVEST/EXPAND => INCREASE IN THE QUANTITY/QUALITY OF CAPITAL 

"Lower profits tax, incentivises me to expand my business"

• • • • "What are the limitations?"

        • • If BUSINESS CONFIDENCE IS LOW, firms will be reluctant to invest these extra profits, as they may fear they won't be able to sell teh extra output.

• "I am now the proud owner of a former state-owned industry and I will run it much more efficiently"

• PRIVATISATION aims to EXPOSE PREVIOUSLY STATE-OWNED and INEFFICIENT INDUSTRIES to COMPETITIVE PRESSURES by SWITCHING THEIR OWNERSHIP TO THE 'PRIVATE' sector.

  • • WITHOUT THE INCENTIVE TO MAXIMISE PROFITS and CUT COSTS as well as HIGH INDUSTRIAL BARRIERS TO ENTRY, public sector industries have LITTLE INCENTIVE TO WORK EFFICIENCTLY, nor COMPETE ON QUALITY unlike in the private sector.

    • If sold to the PRIVATE SECTOR the PRESSURE OF COMPETITION as well as the PROFIT MOTIVE, will INCENTIVISE them to provide HIGH-QUALITY products at LOW PRICES.

    • Thus these firms will be incentivized to INVEST MORE IN PRODUCTIVE CAPACITY and NEW PRODUCTION TECHNOLOGY, boosting potential output.

      • "What are the limitations?" Again, as with deregulation, privatisation will not necessarily ensure greater competition. Especially over time, a monopoly may develop. A private sector firm may be less inclined to take into account social costs and social benefits than a state-owned enterprise and may be more willing to make workers redundant.

LABOUR MARKET REFORMS are designed to MAKE LABOUR MARKETS MORE EFFECTIVE. The intention is to increase the quality, quantity and flexibility of labour. 

"We were scared to hire staff, as if they turn out to be rubbish it's so hard to fire them, but not anymore, so we are now encoraged to do more hiring without fear"

• • • • MAKING 'HIRING' AND 'FIRING' EASIER FOR EMPLOYERS is likely to make it EASIER FOR FIRMS TO ADJUST THEIR SUPPLY TO CHANGING MARKET CONDITIONS, for example when the good is seasonal they can quickly hire workers and then let them go in the off-season WITHOUT ANY HASSLE. 

        • • • "What are the limitations?" There is a risk, however, that firms may not spend as much on training their workers if they think the workers may not be with them for very long.

"Without trade unions, we don't have the threat of strikes so we are encouraged to hire more workers and will base our pay on ability rather than being pressured"

• • • • REDUCTION IN TRADE UNION POWER as this will LESSEN THEIR POWER TO NEGOTIATE HIGHER WAGES, thus firms will be able to PAY LOWER WAGES, which will ENCOURAGE THEM TO HIRE MORE STAFF. 

        • • • "What are the limitations?" However being paid less and working more hours may reduce the motivation of workers and make them tired which would be likely to reduce their productivity.

"We could barely survive paying the minimum wage, in fact we had to reduce our staff, but now it's abolished we can hire more at lower wages"

• • • • ABOLISH THE MINIMUM WAGE, as this will LOWER LABOUR COSTS and ENCOURAGE MORE FIRMS TO HIRE.

        • • • "What are the limitations?" Of course the minimum wage was implemented in the first place to improve the standard of living of those on lower incomes, and without it some may fall into poverty.

• "We are a cutting-edge AI start-up firm, and thanks to gov't subsidies we are about to become one of the top 5 firms in the world, generating huge incomes in the UK"

• A government may PROVIDE SUBSIDIES subsidies to the firms in particular industries for a number of reasons connected to increasing the performance of markets. 

  • • • • For example, new small firms might be subsidised in order to increase competition in markets. Firms may also be subsidised to encourage them to buy new capital equipment. 

        • "What are the limitations?" Of course, consideration would have to be given as to whether this is the best use of government spending and there is the risk that the firms may become dependent on the subsidies.

• Clearly greater levels of economic activity via productivity gains, a larger workforce and technology advancements will lead to INCREASES IN GDP.

• Clearly greater levels of economic activity via productivity gains, a larger workforce, and technology advancements will lead an increase in GDP as a result of AN INCREASE IN LRAS, hence this wil actually PUT DOWNWARD PRESSURE ON PRICES.

• Clearly greater levels of economic activity via productivity gains, and a larger workforce will imply MORE JOB OPPORTUNITIES which should LOWER UNEMPLOYMENT considerably.

• As mentioned price level should fall, MAKING 'MADE IN HK' more competitively priced which should INCREASE DEMAND FOR EXPORTS.

• Sketch an ADAS diagram showing the impact of supply side policies on the macro aims.

8-MARKERS

Discuss whether supply-side policy measures will reduce a government's budget deficit.

Discuss whether or not an economy benefits from many of its students studying abroad.

6-MARKERS

Analyse how supply-side policy measures could reduce unemployment.

Analyse policy measures a government could use to attract workers to return to their home country.

Analyse how a government could encourage firms to increase their investment.

4-MARKERS

Explain the effects of low confidence on both spending and borrowing.