Unit 4: June 11 Essay 1 Question 8 – Supply Side Policies

08: Assess the contribution which supply side reforms might make in helping major recessions

Introduction and Development:

  • Supply Side Reforms- policies/measures that would help to affect the total output of the economy- supply side policies
  • Recession is where there is two or more consecutive quarters with negative economic growth.

Point 1- What can supply side policies do first 

Supply side policies as said can affect aggregate supply and with these policies there could be the potential outcome of both high output( gdp) and also lower prices. This can be shown by the diagram-

From Tutor2U Aggregate Supply

  • Aggregate Supply shifts to the right due to these measures meaning price moves from p1 to P2 and output increases from Y1 to Y2. This should mean that lower prices would attract more consumers to buy goods.( no conflict between macroeconomic objectives) 
  • Potentially lead to an increase in AD as consumption increases,
  • Plus also could mean our exports could be cheaper therefore also potentially increase our international competitiveness 
  • Therefore could help us avoid a recession and help to sustain growth itself 

Examples: 

Supply Side Reform 1: Investing in education and training

  • This could help to increase occupational mobility as people who did not have, have more skills to do higher level jobs leading to an increase in output for the economy,
  • Additionally education and training in regional areas where structural unemployment has been a problem over the year due to deindustrialisation would definitely benefit society. 

However:

  • Education and Training can take up to years depending on people aswell as we assume people will definitely become qualified, well trained. Recession is two quarters (6 months) and it may be  too long to prevent one. 
  • Some people may not have the incentive due to again the time it takes and sometimes the costs such as transport etc. 

Supply Side Reform 2: Creating Incentives for Businesses 

  • This would include lower taxation for businesses such as corporation taxes, less insurance for its workers 
  • This could encourage investment in such of new machinery which could increase output in the future, also potentially increase ADemand as well( I ) 
  • There could be benefits or less tax for businesses in terms of research and development so they could help to develop new products, new machinery in order to help increase total output
  • Additionally could help to increase new businesses by subsidizing them like the Princess Diana Award.

However: 

  • Need to consider how much tax for the business will be cut? If it is still remains a quite a large proportion of their revenue businesses might have no incentive to invest.
  • Opportunity cost for government if it is at a large scale, would they want to invest at anywhere else. Government are in high debt in terms of spending and this may increase it. 
  • Also 2008/2009 recession had been global so effects in terms of new goods from these measures might not show effect until other major trading partners improve aswell. 

Additionally it also seems due to the long term of these supply side policies there must be a stimulant for the short term aswell. These would include demand side policies such as government spending aswell but on bigger projects such as infrastructure- building new roads, hospitals, schools. Therefore creating jobs. 

This would hopefully help to create a multiplier effect and get the economic into boom or recovery mode again. 1930s Keynsian Policies. 

Conc : Overall Supply side policies are definitely needed because there a huge number of people who need them in terms of finding new jobs which could help us to increase output of the whole economy for the long term so there could be a more sustained growth. However the main disadvantage of supply side policies is it is not a short term policy and a recession might occur during when supply side policies have still not taken effect. So demand side policies might be needed aswell such as increase in government spending on infrastructure.Demand side would stimulate and supply side would sustain, hopefully avoiding a recession.

Advertisements

One thought on “Unit 4: June 11 Essay 1 Question 8 – Supply Side Policies

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s