Supply-Side Policy Definition:
– Supply-side policies increase aggregate supply of the economy by increasing economic productivity or improving market efficiency.
– Market-based supply-side policies aim to provide incentives and reduce market inefficiency, such as reducing business taxes to promote investment, privatisation and tackling labour unions to improve labour market efficiency.
– Interventionist supply-side policies aim to improve productivity, such as by investing in education, healthcare and infrastructure.
Supply-Side Policy Examples & Explanation:
Supply-side policies can be a way for the government to achieve economic growth in the longer term, especially for policies focused on investment. China’s investment in infrastructure (roads, electricity, telecommunications) in the last three decades has contributed significantly to economic growth. Infrastructure can reduce business costs and create more business opportunities, shifting aggregate supply (AS) to the right. This leads to an increase in GDP without inflating the price level, when compared to demand-side policies. Developing countries with good infrastructure tend to attract more foreign investment (e.g. due to low transport cost by having roads). This can lead to even further economic growth, although one can argue China’s high spending in infrastructure may not be sustainable. The lower cost of production for businesses will also help to improve international competitiveness for goods produced in the country, which can help in reducing a current account deficit. Although China’s current account surplus is more likely due to the relatively low cost of labour in the country in the past.
Supply-Side Policy Notes with Diagrams
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The left video explains supply-side policy, the right evaluates the advantages and disadvantages of the policy.
Supply-Side Policy Multiple Choice & Essay Questions (A-Level)
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Supply-Side Policy in the News
Related A-Level, IB Economics Resources
EconPlusDal YouTube Channel
– UK Supply-Side Policies