The Impact of Supply-Side Policy on Macroeconomic Objectives (Edexcel IGCSE Economics)
Exam board Pearson Edexcel · IGCSEUpdated 2024-06-24
Impact of Supply Side Policies
Spec point —
2.1.2c
- The benefits of supply side policies far outweigh the negatives; however, they often take many years (up to 20 in some cases) to fully develop
- Therefore, many economies fail to develop their supply side policies because of political change and an associated change in government priorities
- When successful, supply side policies have the following effects on the government's macroeconomic objectives
Impact of supply side policies on macroeconomic objectives
| Macroeconomic Objective | Impact |
|---|---|
| Economic growth | - Supply side policies increase the rate of growth of an economy - Deregulation or privatisation. encourages new firms to enter the market, which stimulates economic growth - Spending on infrastructure projects or education and training increases potential national output, leading to higher real gross domestic product (rGDP) |
| Low and stable inflation | - Supply side policies reduce inflation as lower taxes, privatisation or deregulation can reduce the cost of production - There is also a greater supply in the economy, which results in reductions in the prices of goods and services, leading to disinflation and making the exports of the nation more competitive |
| Low unemployment | - Improving the quality of the workforce through better education and training can reduce unemployment levels - Greater productivity will lead to higher demand for labour |
| Stable current account on balance of payments | - Supply side policies often increase the value of net exports - Due to the increased supply, the prices of goods and services often decrease, which makes them relatively more attractive to foreigners, so exports increase |
| Environmental protection | - Large infrastructure projects and transport projects almost always have some negative externalities associated with their creation - E.g. Building a dam in a gorge to create a hydro electric station damages the natural environment and ecosystem |
| The redistribution of income | - The distribution of income may worsen as deregulation offers less protection against low wage employment - Reducing taxes results in less government tax revenue and unemployment benefits, leading to a decrease in income redistribution |
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