ACJC Macro Policies (2) - Supply Side Policies and Conflicts

©ACJC Econs Dept/2024/H1H2 Macroeconomic Policies Part 2: Supply Side Policies 1 ANGLO-CHINESE JUNIOR COLLEGE JC2 Economics 2024 H1 H2 MACROECONOMIC POLICIES (2) Supply-Side Policies and Conflicts in Macro Objectives Section Contents Page 1 Overview 2 2 Supply Side Policies 3 2.1 Long Run Supply Side Policies 3 2.2 Short Run Supply Side Policies 8 3 Conflicting Macroeconomic Objectives 10 4 Annex 14 Texts for References: 1. Principles of Economics: Case, Fair & Oster, 10th edition, pages 638-644, 662-663 2. Principles of Economics, Asian Edition: Mankiw, Quah & Wilson, chapter 25 3. Economics: John Sloman & Alison Wilde, 7th edition, chapters 14.4, 14.5, 22 & 23 4. Economics Today: • Volume 21 Issue 1, Pages 10-15 • Volume 24 Number 2, Pages 22-28

©ACJC Econs Dept/2024/H1H2 Macroeconomic Policies Part 2: Supply Side Policies 2 1. OVERVIEW: In part 1 of Macroeconomic Policies, we learnt that governments could adopt the following policies to address macroeconomic problems and achieve their macroeconomic goals. Governments’ macroeconomic intervention for dealing with macroeconomic problems involves the use of a set of policy instruments. These policy instruments can be classified as follows: **H2 only *H2 only

©ACJC Econs Dept/2024/H1H2 Macroeconomic Policies Part 2: Supply Side Policies 3 2. SUPPLY SIDE POLICIES: Unlike demand-side policies, many policies can be classified as supple side policies. Generally, however, supply -side policies tend to be focused on increasing the productive capacity and lowering the unit cost of production in the economy. Supply-side policies aim to promote long run growth, reduce macroeconomic instability, and improve factor mobility. • Long term growth can be promoted through policies which aim to raise the quantity and quality of resources (e.g., investments in education, capital, and technology etc). • Macroeconomic instability can be reduced through policies which aim to quickly lower economy -wide production costs (e.g., wage subsidies, cuts in employers’ social security contributions, price controls on wages or rentals) or to directly manage prices of necessities (e.g., subsidies or price controls on food and fuel) • Factor mobility can be enhanced by promoting retraining, job matching and various forms of deregulation to enable both factor and product markets to operate more efficiently. Supply-side policies can be categorised into policies targeting the LRAS and/or SRAS. 2.1 Policies that affect LRAS Long-run supply -side policies are mainly implemented to increase the productive capacity of an economy. Supply-side policies that seek to increase LRAS can be broadly categorized into 4 categories: a. Policies to improve the quality and quantity of the labour force. b. Policies to improve infrastructure developments. c. Policies to improve the level of technology. d. Policies to promote competition between firms. a. Policies to improve the quality and quantity of the labour force. Education, retraining and upskilling: • Example 1: The Workfare Skills Support (WSS) Scheme in Singapore provides workers with a training allowance when attending, rewards workers for completing courses with bonuses, and pays up to 95% of the worker’s salary during the training duration. • Example 2: SkillsFuture Singapore (SSG) provides credits to workers that can be used to subsidize the cost of courses, promoting life-long learning. • Both the WSS and SSG encourages workers to increase their education and upskill themselves increases labour productivity assuming no change in the quantity of factors of production and level of technology increases the maximum output of the economy increases productive capacity.

©ACJC Econs Dept/2024/H1H2 Macroeconomic Policies Part 2: Supply Side Policies 4 Good to know: Policies to improve the quantity of labour: Many policies also strive to increase the quantity of labour. For example: • Immigration policies – allowing more foreign workers into the country. • Retirement regulation – increasing the official retirement age, allowing more to remain in the workforce. • Pro-familial policies – cash incentives and tax rebates for having children, children’s subsidies, and extensions of maternal and paternal leave makes it easier for households to have children, increasing the labour force in the future. These support schemes also allow more mothers to return to the labour force, increasing the labour force size in the short term as well. With a larger labour force size, more output can be produced in the economy, ceteris paribus, increasing the productive capacity and LRAS. b. Policies to improve infrastructure developments. • Example 1 : building new mass -rapid transit (MRT) lines and procuring more MRT trains. By 2030, the goal is to have 80% of the resident population living within a 10-minute walk to an MRT station. • Example 2 : expanding the airport (Changi Airport Terminal 5, operational by 2025) and seaport (Tuas Megaport, operational by 2040s) • Improving in transportation infrastructure reduces travel and transportation time allows workers to spend more time at work increases labour productivity increases productive capacity, ceteris paribus. c. Policies to improve the level of technology. • Example 1: setting up, funding and subsidising research institutions like A*STAR, and local universities (e.g. NUS / NTU / SMU). These research institutions often conduct scientific and technological research with the objective of developing new products and/or methods of production. • Example 2 : Productivity Solution Grant (PSG) provides up to 50% funding for Small-Medium Enterprises (SMEs) to procure equipment or digitalisation efforts (e.g. building websites) that allows the firm to increase its productivity. • Example 3 : incentivising Multinational Corporations (MNCs) (e.g. Dyson, Hyundai, Panasonic, etc) to invest in Singapore, often through generous tax rebates and subsidies. When MNCs set up in Singapore, they bring with them new and efficient methods of production, allowing a transfer of technology. • Increasing the level of technology by adopting more efficient methods of production allows firms to produce with greater productivity and to produce more with the same number of factors of production (e.g. number of workers) → increases productive capacity, ceteris paribus.

©ACJC Econs Dept/2024/H1H2 Macroeconomic Policies Part 2: Supply Side Policies 5 Good to know: Policies to promote competition between firms. In addition to the above 3 types of supply -side policies to increase the productive capacity of the economy, there are also policies that promote competition between firms. These policies usual focus on ensuring a sufficient level of competition in the economy (for example by preventing mergers between firms with significant market power, legislating quality or production standards, allowing more firms to enter the market, etc). In general, these policies provide firms incentive to continually adopt more productive methods of production to compete with their rivals. Doing so results in a higher level of productivity in the economy and hence productive capacity, ceteris paribus. H2 students should refer to your JC1 notes on “Firms and Decisions” to revise the concept of “ Dynamic Efficiency ”. Policies to promote competition improve the economy through achieving dynamic efficiency in markets. Policies affecting LRAS will help achieve: • Potential economic growth o An increase in the productive capacity of the economy → rightward shift in the LRAS → potential economic growth. • Sustained economic growth (both actual and potential growth) o Short term effect for economies currently oper