RI 2023 Supply-Side Policy

RAFFLES INSTITUTION YEAR 6 H2 ECONOMICS 2023 MACROECONOMIC POLICIES: SUPPLY SIDE POLICIES Contents 1 Introduction ................................................................................................................ 138 2 Objectives of Supply-Side Policies and its Impact .................................................... 138 3 Types of Supply-Side Policies ................................................................................... 139 3.1 Market-oriented Supply-Side Policies ................................................................ 139 3.1.1 Market-oriented Supply-Side Policies for Product Markets ......................... 139 3.1.2 Market-oriented Supply-Side Policies for Labour Markets ......................... 141 3.2 Interventionist Supply-Side Policies .................................................................. 143 4 Effects of Supply-side Policies on the Economy ....................................................... 148 4.1 Effect on Growth and Inflation ........................................................................... 148 4.2 Effect on Employment ........................................................................................ 150 4.3 Effect on Balance of Trade and Balance of Payments ...................................... 150 4.4 Effects on Standard of Living ................................................................ 150 5 Limitations of Supply-side Policies ............................................................... 151 Appendix 1: Trade Unions & Tripartism in Singapore ............................................. 152 References: Abel, Andrew B., & Bemanke, Ben S., Macroeconomics, 4th Edition, Addison-Wesley Froyen, Richard T., Macroeconomics: Theories and Policies, 6th Edition, Prentice Hall Gordon, Robert J., Macroeconomics, 8th Edition, Addison-Wesley Lispey, Richard G, Steiner, Peter 0, & Purvis, Douglas D, Economics, 9th Edition, Harper Collins Slavin, Stephen L., Macroeconomics, 8th Edition, McGraw-Hill Sloman, John, Economics, Prentice Hall Cook, Mark, & Healey, Nigel, Supply Side Policies, 4th Edition, Heinemann At the end of this lecture series on Supply-Side Policies, you should be able to: 1. Explain the general objective of supply-side policy 2. Analyse the Impact of these policies on cost of production, productive capacity, level of technology, degree of competition trade in goods and services and level of enterprise using AD- AS analysis. 3. Explain the various types of supply-side policies -for example, supply-side tax cuts, deregulation and competition policies, elimination of structural bottlenecks, removal of bureaucratic red-tape, promoting labour mobility and productivity. 4. Explain examples of supply-side policies implemented by the Singapore government. 5. Discuss how governments use supply-side policies (impacting AS) to achieve macroeconomic objectives. 6. Evaluate the effectiveness of supply-side policies -for example, accuracy and availability of information, time lags, uncertainty of outcomes, policy acceptability and policy conflicts. © Raffles Institution Economics Department 137

Year I H2 Lecfll19 Noles 2023 ~riamlc Polclaa: Supply Side Pd/des 1 Introduction Prior to the G~ Depression In the 1930s, public policy was shaped by the views of classical economists 'MIO advocated laissez-faire and the belief that recessions were short-nm phenomena that corrected themselves through free market forces. Dlsaetionary fiscal policy was seldom used to Influence the performance of the maaoeconomy explicitly. Folowing the onset of the Great Depression, macroeconomic discussion has been dominated by discussions of aggregate demand, and how to aeate more of It through monetary and fiscal policies. HoweVer, during the 1970s, the i:roblem was stagflation: slow growth and high Inflation. Demand management could not solve stagflation: an i'lcrease in NJ would only worsen inflation while a decrease in NJ would worsen unemployment. The solution to stagflation was to switch from demand management to •supply-side policies•. The logic was powerful: The only way to achieve lower prices and higher output was to make economies more productive. Governments across the world have Increasingly focused on supply-side policies; these are poicies designed to increase the potential output of economies and hence long-run aggregate supply. This focus has rettected the resurgence in Interest amongst academics i1 the determinants d gowth and, in particular, attempts to gain a better understanding of the sources of productivity increases, such as technological progress and innovation. 2 Objectives of Supply.Side Policies and Its Impact Most governments beleve that Improved supply-side performance is the key to achieving sustained growth without causing a rise in inflation. Supply-side economic policies are therefore designed to Improve structural long-term performance of an economy, in other words, to Improve the productive capacity of an economy by increasing the quantity, quality and mobfffty of factors of production In an economy. Many supply-side po6cies are mia-o-economic policies aimed at making markets and industries operate more efficiently and contribute to a faster underlying-rate of growth of real national output. Diagrammaticaly, 1) An Increase In the productive capacity of an economy from YFo to YF1 is iDustrated by a rightward shift of the AS curve from ASo to AS1. This is also known as potential growth (Figure 1 ). C Ra/lies Institution Econonica Department I···• •• '· I •., ..... I ·, I AD, I I I , .. --+ ,., _ _......,... Figure 1: Rightward shift of AS Curve 138 Note: Supply-side poftcy on Its own however is not enough lo achl sustained eve econonic growth. It must ba supported by a hl!Jl enough level of aggregate demand.

Ma~,:;::/ ... H2 lecture Notes 2023 ..... a: Su~ Side Pdi<ies Z) se In the productive capacity of the econom f rfle fncrea h an advancement In level of technol;' rom YFo to YF1 (e g. thr~u9 by a fall in unit cost of production which g~) m ~n also be adcomPadn,eand downward shift of the AS curve respectively f, us ASrated by a •ghtwar rom o to AS, (Figure 2). l :·:"., I L--...!------;:;-' _. ,·•.,~ I I I I 'AD. y• Y.,. Y1 Yn Ralnational output Figure 2: Rightward and downward shift of AS Curve concepts to focus on therefore are Incentives, enterprise, technology, mobility, ::~lbflity and efficiency. sectional summary: -The key objective of supply-side policies is to improve the structural long- term perfonnance of an economy When discussing the effect of supply-~ide policies, an attempt should be made to link to one of the three possible effects cl the policy on the AS on er unit COP/ on roductive ca acit / on technolo 3 Types of Supply-Side Policies There are two broad approaches to supply-side policies: market-oriented policies and Interventionist policies. 3.1 Market-oriented Supply-Side Policies Market oriented supply-side policies aim to reduce the role of the government and enable the market to work more freely by putting more emphasis on market incentives and competition. They are designed to give the private sector more freedom. Such market oriented supply-side policies can be targeted at the product or labour markets. 3.1.1 Market-oriented Supply-Side Policies for Product Markets Product markets ref er to markets in which all kinds of goods and services are made and traded, for example the market for airline travel; smart-phones, new cars; pharmaceutical pr~~cts and the markets for services such as banking and mortgages. Supply-side Policies in product markets are designed to Increase the degree of competition and efficiency In product markets. ORames Institution Eeonom1cs Department 139 Key policies: The maln market- orientated policies are pro-competition policies, deregulalial, and tax cuts.

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