Grade 8C IGCSE
_________________________________Penabur International- Jakarta________________
- 5.1.3:Discuss whether the demand side policy instruments are always more effective in achieving the macroeconomic objectives than supply side policy instruments.
Last date for Submission:
May 11th, 2014
Please Write Your Response in 750 Words
Note:
Marks allocation for this article is 20.
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A. Theoretical Explanation 5 Marks
B. References. 5 Marks [Use Harvard referencing style]
C. Use of Key words. 5 Marks
D. Evidences in the support of explanations 5 Marks
Policy instruments are used by government to help achieve government’s objectives during two economic conditions which are prosperity and recession. These policy instruments are divided into two, demand-side policy and supply-side policy. The demand-side policy is aggregate demand, supply-side policy is aggregate supply. Both sides do have different effects and methods in achieving the objectives.
ReplyDeleteThe demand-side policy influences the economy through different policy instruments which include level of taxation, public expenditure and interest rates. They affect the level of aggregate demand, in order to balance the aggregate demand and aggregate supply, which is nearly impossible to occur in an economy. Aggregate demand is the total consumption, total output, total production and total demand. It includes household consumption, firms’ investment, government expenditure and exports and imports. When aggregate demand is greater than aggregate supply, prices will increase and therefore causes inflation. Government then uses fiscal or monetary policy to either reduce demand or increase supply.
Expansionary fiscal policy is done by the government to increase aggregate demand. The government uses this policy instrument in the hope to boost employment and output by reduce tax or increase its expenditure. Taxes could be reduced to increase output and investments. Cutting taxes on personal incomes may motivate employees to increase their productivity. It will also increase the amount of disposable income people have and able to spend on goods and services. Despite the benefits or advantages of cutting taxes, there is a risk that people may simply spend their extra money from tax reduction on imported goods and services.
Expansionary monetary policy involves cutting interest rates and expansion in the money supply to boost aggregate demand. If interest rates are reduced, people and firms will borrow more money from banks. This can help raise consumer expenditure and increase investment by private firms. Therefore, it can help boost output and employment opportunities in a country. However, lower interest rates can also reduce the saving of money from people and firms in banks. It may also triggers inflation due to high consumption.
Contractionary fiscal policy aims to reduce aggregate demand by increasing tax, reduce public expenditure and reduce subsidies. As taxes rise, disposable income will decrease and demand falls. In this policy instrument, public spending and private spending will both decrease and increases government taxes. However, the drawback would be that contractionary fiscal policy may reduce employment and growth in output.
Contractionary monetary policy involves raising interest rates and cutting the money supply to reduce aggregate demand. Increasing interest rates will as well increase the cost of borrowing. This will reduce the amount of money banks have available to lend. Reducing the quantity of money in the economy will also restrict the amount of consumers and firms have to spend on goods and services. However, falling aggregate demand may result in even rising unemployment and if firms cut back their investment it can also damage future economic growth.
On the other hand, supply-side policy includes also several policy instruments. Aggregate supply is the total firms’ production, total government production and total imports. It increases production, increases subsidy and reduces corporate tax. Supply-side policy influences the economy by increasing or decreasing aggregate supply and often affects the producers.
ReplyDeleteSelective incentive to producers include tax holiday wherein there is no need to pay tax. Government provides raw materials and there happens to be lower interest rates. High rates of tax on personal incomes may reduce people’s incentives to work hard, similarly that it can also reduce the incentives of entrepreneurs to start new firms or to expand their business. Firms that increase investments in these activities may be granted lower taxes on their profits and exemptions from import and other duties. Government may also use selective incentive to consumers.
Rules and regulations can also increase aggregate supply by implementing rules to every citizen. For example in Indonesia, students are asked to wear Batik every Friday. This would increase Batik Keris’ or any other Batik stores which will have increases in their sales and demand. This may also help boost employment as Batik stores build new factories.
Labor market change involves increasing wage rate so that it would help increase labor in the country. The payment of welfare benefits by a government to the unemployed may discourage some people from seeking paid employment. However, cutting payments to support people in unemployment may conflict with aims to reduce hardship and poverty that are often the result of long periods of joblessness.
Training and education is often required to increase labor productivity. in order to firms to be successful they should have access to a highly trained and skilled workforce. A well-educated and trained workforce will be better able to adapt to new production methods and technologies. Government can assist firms by helping them design and finance training programs.
Privatization is when public company becomes private company because private company can export more goods. This may also increase efficiency. If private firms can deliver public services at a lower cost and better quality than the public sector then consumers will benefit and taxes can be lowered. However, some people argue the profit motive of private sector firm’s results in cuts in service levels and hikes in prices.
Demand-side policy and supply-side policy both have their own policy instruments in achieving government objectives. Those instruments are sometimes effective and sometimes don’t, depend on how they are used in the economy. So demand-side policy is not always more effective than supply-side policy in achieve the objectives.
100% Originality
Resource:
Economics Textbook
To begin with, the policy instruments are the instruments used by the government to help them achieve their macroeconimic objectives. There are fiscal and monetary policies. Also, there is the demand side and supply side policy. Each of them has its own purposes and function that will take part in helping to achieve the macroeconomic objectives of the government.
ReplyDeleteFirst of all, in the demand side policy instrument, total public expenditure, and over all expenditure are a part of a fiscal policy instrument. And interest rate is a monetary policy instrument. Now, the fiscal policy instruments. The total public expenditure, in other words is when the government collects taxes from rich people and will then be used for public expenditure. Those expenditures can be capital or current expenditure. Capital expenditure is basically for machines or assets used for the coporations owned by governments. And current expenditure is the salary paid for the employees that work for the government.
By having the increase in public expenditure, it will help to achieve the macroeconomic objectives. This is because if you have an increase in the current and capital expenditure, then it will help to increase the level of employment. In other words, the more able the government to pay an appropriate amount of salary, then the more people will be interested and soon enough employment will increase and they can also have a job satisfaction. For capital expenditure, it will help the business itself because then it can increase the efficiency and productivity of the company.
Second of all, interest rate, which is a part of monetary policy instrument. Monetary policy instrument can be borrowing money from banks to invest their businesses. There are actually several monetary policy instruments used, interest rate, bank rate, CRR (cash reserve ratio) and SLR (stationary liquidity ratio). CRR or cash reserve ratio is when you borrow money with a specific amount and it depends and may vary.
Also, there are some non-monetary benefits. One of the example of non-monetary benefits is by giving wages. This specifically means giving benefits, cash of kind. For example, doctors normally get free medicines.
Governments will experience either a greater aggregate demand than an aggregate supply, or the other way around. When they experience a greater aggregate demand than an aggregate supply, they will either do an expansionary fiscal or monetary policy instrument.
In an expansionary fiscal policy instrument, the government will try to increase the aggregate demand by doing several ways. They will reduce taxes, either direct or indirect tax. This will catch the attention of the consumers. What will increase the number of consumers is also if they reduce the price or create discounts.
In a contractionary fiscal policy instrument, it is the opposite. The government will try to decrease the aggregate demand by increasing taxes. They have to reduce the demand because if the demand keeps on increasing, then it will cause an increase in price. If this gets too uncontrolled, then the inflation will be bad and can cause an economic problem in the country.
Next, in an expansionary monetary policy instrument. It is when the governments try to increase the aggregate demand using interest rates, bank rates and etc. What they will do is that they can reduce the interest rate, in order for people to borrow often and in result, consume more. This way, borrowing and spending will increase.
And last but not least, in a contractionary monetary policy instrument, it is when the government will try to reduce the aggregate demand. This is the vice verse of the expansionary of monetary policy instrument. They will do the opposite, which is to increase the interest rate in order for the consumers to reduce their loan on borrowing and to reduce their spending as well.
ReplyDeleteHowever, sometimes using fiscal policy can cause some disadvantages as well. First of all, it is cumbersome to use. In other words, it is difficult and not as easy as it is planned out. Second of all, it will cause some crowding out effect. Crowding out effect is when the public spending is greater than the private spending. This is not good because private spending is more efficient than the public spending since private spending is government spending. And the last example, but not least, is that it will increase public expenditure which may also cause inflation. Inflation is actually good for the company because then they can receive profit. However, if it is uncontrolled, then it is not good.
Supply – side policy instrument is different. Their policy instruments vary from demand – side policy instrument. Their selective incentive to produce, is one of them. This means that they can sometimes have tax holiday. Tax holiday is where they will not need to pay tax.
Second of all, is to have changes in the labour market. In other words, it is changing the wage rate and it will help to increase the employment in order for it to have a high and stable level of employment.
And last but not least, is to have a constant training and education. This will provide good, qualified and high-skilled workers to be available for employment in the future. This can increase the efficiency in the company that will hire those high-skilled workers and employment in the country might also increase.
originality 95%
Sources:
Economics notebook
Demand-side fiscal policy is what is commonly known as fiscal policy. This focuses on government intervention to shift aggregate demand in or out depending on whether unemployment or inflation is the most pressing issue. When unemployment is the problem, the government wil carry out fiscal policy to shift demand out by decreasing taxes and increasing spending. When inflation is the problem, the government will try to stabilize prices by shifting demand in though increasing taxes and decreasing spending.
ReplyDeleteThese two policies, however, are ineffective when both unemployment and inflation are problems. This problem, called stagflation, is when supply shifts in, due to any of a variety of factors, which increases equilibrium price and decreases Quantity/Real GDP. If the government tries to combat unemployment, dangerous levels of inflation will occur. If the government tries to combat inflation, unemployment will increase. In order to solve this problem, the government will attempt "supply-side" policies, intended to help businesses produce more which would solve both unemployment and inflation. This could occur by decreasing corporate taxes or subsidizing corporations enough so that companies would produce more and be able to hire more workers.
The government may make changes in income tax for a number of reasons. A Keynesian government may choose to vary the level of tax to try to influence the level of aggregate demand and therefore economic growth. This would be using tax as a demand-side policy .
A Classical government would view the role of tax as an instrument very differently. It would argue that taxation should be as low as possible to create incentives for people to work harder. Low tax should also encourage entrepreneurs as they will not lose much of the profit in taxation. Using tax in this way to encourage enterprise and hard work is a supply-side policy .
Many governments will use taxation in a combination of these two ways and will formulate their policy to fit the prevailing conditions. However, whenever changing income tax in the Virtual Economy, remember that there will be demand-side and supply-side effects. To cut taxes for supply-side reasons only may mean also cutting government expenditure by the same amount. In this way, you increase demand through the tax cut, but then reduce demand from the government expenditure cut.
A logical argument on the supply side is that if taxes were lower on the producers, they would lower their prices. This would in turn allow consumers to buy more of the product at these lower prices, encouraging suppliers to produce more product, lowering costs and prices even more. On the other hand, with demand side theory, if the consumer is given more money to buy, that too should result in more production which would further reduce costs and prices.
A logical argument on the supply side is that if taxes were lower on the producers, they would lower their prices. This would in turn allow consumers to buy more of the product at these lower prices, encouraging suppliers to produce more product, lowering costs and prices even more. On the other hand, with demand side theory, if the consumer is given more money to buy, that too should result in more production which would further reduce costs and prices.
Originality 85%
Sources:
http://www.bized.co.uk/virtual/economy/policy/tools/income/inctaxth4.htm
http://www.slideshare.net/ajmccarthynz/34-demand-and-supply-side-policies
Economics notebook
first of all, there are 2 types of policy instruments used by the government to achieve their objective in both prosperity and recessive conditions which are divided into 2 polivy instruments such as demand side policy indtruments and supply side policy instrument. The demand side policy instrument are known as the aggregate demand and the supply side policy instrument are known as aggregate supply.
ReplyDeleteAggregate demand or also known as demand side policy instrument are trying to influence the level of aggregate demand in an economy using a number of different policy instruments include total public expenditure, the overall level of taxation which may involve in the fiscal polivy and the rate of interest which may involve in the monetary policy.
Demand side policy instrument may be effective since the amount of money consumers are spending may depend on their disposable income, taxes and profits may influence business in amount of money to invest on new machine and demand for labour, by the increase in the public expenditure may boost the total demand and can affect on stimulating higher output and employmant in the economy, and as the interest rates rise consumers will save their money and spend less on goods and services which may encourage the investments from overseas and as the interest rate fall, firm may borrow more to invest.
While expansionary fiscal policy happen when government want to increase the aggregate demand in economy to boost employment and output by increasing the public expenditure or reduce the taxation. When taxes are reduce, firms may used their profit on investment to machinery while individuals may encourage themselves to increase their productivity and will increase their consumption on goods and services. But there will also be the risk of they will save their extra money and used it to buy the imported goods which may reduce the consumer’s demand.
Also contractionary fiscal policy aim to reduce pressure on prices in the economy by cutting the aggregate demand through reduction in the public expenditure or raising the total taxation. Increasing the taxes rate may reduce the workers disposable income which also may reduce the consumer’s consumption which it may affect on decreasing of employment and growth.
Also there is contractionary monetary policy which may involve on raising interest rate and cutting the money supply to reduce the aggregate demand if the economy is overheating and inflationary ratios are rising. As the interest rates increase, borrowing will be more expensive which will reduce the amount of money in economy and also reduces the consumption of goods and services which actually may affect on rise of employment and if the firm cut back their investment iw=t may affect the future economic growth.
In the other hand, supply side aim to boost tha aggregate supply of goods and services in an economy which may help to raise the economic growth and employment, increase the supply of exports and reduce the inflationary pressure since more goods and services are available to satisfy the aggregate demand.
ReplyDeleteSelective tax incentives happen when high rate of tax on personal income may reduce worker’s incentives to work also it may affect on owners of the business which are going to start their business or to expand their business but increasing tax rates may have positive impacts to make firms and workers work harder to increase their produvtivity.
Privatization which happen when transfer of public sector activities to private firm who are able to prodivde them more efficiently since they are motivated to make profit from it which may affect on lower cost but better wuaity produces than those by the public sector but it have a negative impactv since prices may be affected.
Selective subsidies in which subsidy is a form of financial assistance paid to business or economic sector by government to help meet their cost which can be used to expand output and reduce the market price for example subsidy on farming can affect on better technology on farming.
Competition policy which there are some firms that may be large and powerful enough to control the market supply of a particular goods and services called monopolies firm which they may set a high cost to earn a large amount of profit and so rules and regulations to make them lower their prices or force them to breaqk up into smaller firms to make a competitive market.
In conclusion, both demand side policy are not more efficient than supply side policy to achieve the government obective since both the demand side policy and supply side policy have their won way to achieve the government obective.
Source :
Economic text book
Originality : 100%
Policies are made to help government fufill the objectives they have. These objectives are low and stable inflation rate, high employment, sustainable growth and stable balance of international trade and payments. Some additional objectives may be to reduce poverty and inequality in income and wealth and to reduce pollution, waste, etc. There are 2 types of policies, demand side and supply side policy.
ReplyDeleteDemand side policy will be used by government to control the demand of the economy to balance it with the supply. They will do this because if the demand is higher than the supply inflation will happen. Government will use either fiscal or monetary policies to prevent this from happening.
Expansionary fiscal policies is when the government try to increase the demand of the consumers. They will do this by decreasing tax. When they decrease tax they will leave the people with more disposable income. The disposable income they use can be used to purchase the goods and services they want and increase the demand for it.
Expansionary monetary policy includes cutting the interest rate for borrowing by increasing the money supply. This will hopefully improve demand by encouraging them to borrow more money. This will also discourage them to save their money so they will be forced to spend them on goods and services. The high consumption however may cause inflation.
Contractionary fisical policies is when the government try to decrease the demand by increasing tax and decreasing subsidies. When this happens their real incomes will decrease and therefore make the demand fall. This will however cause decrease in employment since they're less motivated to work.
Contractionary monetary policy will increase interest rate and decrease the want for borrowing. This will decrease the amount of money they can use and decrease demand. They will do this by reducing the amount of money in the bank. The disadvantage to this is that firms may stop their investment and will cause future economic problems.
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ReplyDeleteGovernment can use supply side policy to control the supply of goods and balance it with the demand in the economy. They will boost the supply by promoting investment, productivity and efficiency. This will allow the company to produce goods and services at a cheaper price. The instruments they use are subsidies (decreases cost), special tax incentive (decreases cost), promotion of competition (increase productivity), selective training (increase productivity) and regulations (decrease cost).
ReplyDeleteThe government will use subsidy for the business so they can produce goods and services at cheaper prices. This will encourage them to invest more in their business and therefore increase supply. They can also decrease special tax so the business will pay less tax than they usually do and therefore they willing to produce more and increase the supply.
Government can also give specialized trainings to the workers. This means that the government will boost the productivity of the worker. When productivity of a worker increases firms will be more willing to increase their demand for them. This means that they will increase supply this way and the employment in the country will also rise.
Rules and regulations may also be needed to either increase or decrease the supply of goods and services. One example is when government forces the civil servant to use Apple or Samsung. This would mean that the demand for Apple and Samsung product will rise. In response to this the company will also increase its supply to match the demand. Government can also make laws such as no smoking to decrease the demand for cigarettes. This would mean firms will decrease its supply in response to the declining demand
Privatization is when public companies turn into private companies. This is because private companies have a better ability to export and sell their goods and services. They are also more efficient than public companies meaning they will make the best use of the resources they get. This is a bit like specialization because they give the job private companies are more suited at.
In conclusion, in normal economic situation both demand and supply side policy are helpful in helping the government to achieve its objeacive. However on overall, demand side policies are often better than supply side policies. This is because they are effective even at recession. Recession is when the economy is at a down-state. They will have lots of un employments and low real income. People won’t have money to buy goods and services. Demand side policies are effective because they boost the real income of the people. This will allow them to consume goods and services. Supply side policies will only decrease the price. But unemployed people will still be unable to afford this even if the price is decreased.
http://www.economicshelp.org/blog/4401/economics/the-role-of-supply-side-policies-in-a-recession/
http://money.howstuffworks.com/trickle-down-in-down-market1.htm
http://moneymorning.com/2009/01/21/the-obama-blueprint-for-solving-the-us-financial-crisis/
93% original
There are four macroeconomic objectives which are low and stable inflation, high and stable employment, high and sustainable economic growth, and also international trade and balance of payment. In order to achieve these objectives, government can apply either demand side policy instrument or supply side policy instrument. Demand side policy instrument is the policy instrument that affect the demand side/ the consumers and supply side policy instrument affect the supply side/ the supplier.
ReplyDeleteThere are some ways for the demand side policy instrument to reach the objectives. The first is by giving off more tax on goods that many consumers want to buy. By giving tax, it will decrease the demand of consumers and help the government to reach the objectives. The second is by giving off subsidies to the consumers. Subsidies are given to increase the demand when supply is high. However, tax is given when supply is low. The third is by making a new rule and regulation that limits the demand of consumers. It can be used to cut total demand when the demand is too high.
The supply side policy instrument can also help the government to reach the objectives. The first way that government can use is by also giving subsidies to the supplier. When demand is high, government can increase the supply by giving subsidies. The second is by providing better education and health. It will increase the supply of the services when there is a great demand. The third is by improving labour mobility. Labour mobility will have a positive effect on labour productivity and on supply-side performance.
The conclusion is the demand side policy instrument is not always more effective than supply side policy instrument. In my opinion, both are effective in order to achieve macroeconomic objectives. This is because both of them help the government to achieve the objectives and both of them sometimes causes problems too. So, both demand and supply side policy instrument are effective in achieving the macroeconomics objectives.
Source: Economy Notebook
Originality 95%
This comment has been removed by the author.
ReplyDeleteIn a macroeconomy conditions are determined by either aggregate demand and aggregate supply. Therefore, it has a demand and supply side. Most governments will have 4 main macroeconomic objectives: low and stable price inflation, high and stable employment, economic growth in national output, and stable balance of international trade and payments. To achieve objectives, government may use policy instruments, which are actions able to control to alter aggregate demand and supply.
ReplyDeleteDemand side policies can influence the aggregate demand using a number of different policy instruments, they include: total public expenditure, overall level of taxation, and rate of interest.
Each of those instruments can be effective as they can increase public expenditure, therefore boosting total demand and stimulate higher output and employent to the economy. As interest rates rise consumers tend to save more and/or borrow less to spend on consumer goods and services. This also encourages investment fro overseas. As interest rates fall firms may borrow more to invest.
Demand side policies include both fiscal and monetary policy. Fiscal policies involve varying the overall level of public expenditure and/or taxation in an economy to manage aggregate demand and influence the level of economic activity.
Reflationary or more commonly known as expansionary fiscal policy, increases expenditure or reduce taxation in order to increase aggregate demand in the economy to boost employment and output. It is commonly implemented during recession or economic downturn, when private sector demand for goods and services are low and falling and unemployment.
However it usually means running or increasing budget deficit, therefore a government must have to spend more or borrow more money to finance it.
Another example of fiscal policies is contractionary fiscal policy; aims to reduce on price in the economy by cutting aggregated demand through reduction in public expenditure and/or raising total taxation. Budget deficit will be cut or go to a surplus when tax revenues exceeds public spending. However, a contractionary fiscal policy can reduce employment and growth in input for it.
However, many economists have criticized the use of them to influence levels of aggregate demand and economic activity in an economy. It is regarded that fiscal policies may not be as effective as they are hard to use. It is difficult for a government to know exactly when and by how much to expand public spending or cut taxes during economic downturn. The increase in public expenditure also crowds out public spending. And the increase of taxes on incoms and profit can reduce incentive work and enterprise. If taxes are too high, people and forms may reduce their work effort. An expansionary fiscal policy also creates expectations of inflation.
Monetary policy involve the changes in the money supply and/or interest rate in an economy to influence levels of aggregate demand. Its main instrument is the minimum lending rate or rate of interest charged by central bank to loan money to the banking system. Raising or lowering the interest rate will affect the rate banks then charge to their business and personal customers to borrow money and the rate of interest savers earn on savings accounts.
But, a government may also directly increase or decrease in the money supply in an economy to help achieve its economic objectives. Examples of monetary policy includes expansionary monetary policy, contractionary monetary policy and exchange rate policy.
ReplyDeleteSupply side policies also influence the economic activity as to demand-side policies, however they control the aggregate supply of the economy and they target economic growth. Expanding aggregate supply helps reduce inflatioary pressurres on pries from rising aggregate demand, provide additional employment opportunities and boost the production of goods for exports. Over the long run, they help achieve macroeconomic objectives of government at the same time. Therefore they are used to influence the behaviours of certain groups of consumers and producers.
An example of supply side policie are selective subsidies. A subsidy is a form of financial assistace paid to business or economic sector by a government to hep meet costs. However, technological advance can increase the efficiency of production, lower costs and create new products to sell.
Privatization involves the transfer of public sector activities to private firms who may be able to provide them more efficiently because they have a motive to make profit from the activities. Profit, however, can be argued between people because of their motive to private sector firm’s results in cut in service levels and hikes in prices.
Another common example are regulation and degulation. Regulation are the laws that often restrict certain activities. They are often used to protect key industries and businesses from unfair competition and protect employment, customers, and environment. New and toughened laws can sometimes increase production costs. For example, firms might have to employ aditional staff and invest on new equipment. If costs increase then the profits might tend to decrease to the firms.
Deregulation helps to remove burdens on business, by reducing production costs and free up resources by simplyfing or removing old and unecessary regulations.
Despite the statements above, supply side economies may instead bring in some inefficiencies to the economy. One of the first claims made by supporters of supply-side economics which states that higher tax rate does not necessarily lead to higher tax revenues. They believed that by lowering tax rate it could actually increase the amount of money brought by taxes, as lower taxes can create economic growth. Government may take a smaller piece of the pie, however the whole pie would be bigger. Practically, supply-side policies of an administration states a decrease in services by government.
It is also said that supply side policy increases disparity between the poor and rich. Supply-side generally supports decrease in income taxes and capital-gains. This benefit more to the rich people. Even when the policy results in unemployment or reduction or claims it benefits most of the people, upper class citizens tend to receive the most.
As conclusion, both demand and supply side policies have their use to influence the levels of aggregate demand and supply to economic activity. Both have their inefficiences when implemented, so it doesn’t mean demand side policies are much more effective in affecting the economy. They are both used for a different target, so a government must plan carefully the necessary factors before using which policy instruments. It must fit exactly to the economic condition.
Sources:
Economics textbook
https://answers.yahoo.com/question/index?qid=20130201155702AAgxRLm
Originality: 99% (smallseotools.com)
Supply side Policy
ReplyDeleteSupply side policy includes any policy that improves an economy’s productive potential and its ability to produce. There are several individual actions that a government can take to improve supply-side performance.
Improving productivity of factors
Measures to improve factor productivity, which is the marginal output generated by factors inputs, include the following:
Using the tax system to provide incentives to help stimulate factor output, rather than to alter demand, is often seen as central to supply-side policy. This commonly means reducing direct tax rates, including income and corporation tax. Lower income tax will act as an incentive for unemployed workers to join the labour market, or for existing workers to work harder.
Other supply-side policies include the promotion of greater competition in labour markets, through the removal of restrictive practices, and labour market rigidities, such as the protection of employment.
Measures to improve labour mobility will also have a positive effect on labour productivity, and on supply-side performance. This improves labour market flexibility.
Better education and training to improve skills, flexibility, and mobility
The adoption of performance-related pay in the public sector is also seen as an option for government to help improve overall productivity.
Government can encourage local rather than central pay bargaining. National pay rates rarely reflect local conditions, and reduce labour mobility.
Demand side policy
The objective of demand-side policies is to increase demand for innovation so as to create incentives for innovation, to improve conditions for the uptake of innovations, and to speed up the diffusion of new technologies). Demand-side innovation policies are often used to boost innovation performance in areas of strong societal demand such as health, population ageing and the environment. They have also received increasing attention as they might help improve the efficiency of public spending through innovation.
Demand-side policies may include different policy domains and support innovation in various ways:
Public procurement (see Innovation procurement schemes and Public procurement for innovation) can stimulate innovation in private firms, when the government acts as a lead user of new technologies.
Governments can stimulate private demand by offering subsidies and tax incentives to consumers that purchase new products resulting from innovation.
Governments set up the regulations for markets and industries, and these regulations influence the articulation of demand for innovation (see Markets, Competition and Standards, Standards and certification, Environmental and safety regulations).
In most OECD countries, governments have paid an increased attention to demand-side innovation policies in recent years. This evolution can be explained by a greater awareness of the importance of feedback linkages between supply and demand in the innovation process a general, and a general perception that traditional supply-side policies have not been able to bring the desired outcomes. Furthermore, pressures on public spending create incentives to explore how demand-side policies might boost innovation without new programme spending.
Originality: 89%'
Sources:
http://www.economicshelp.org/blog/4401/economics/the-role-of-supply-side-policies-in-a-recession/
http://www.bized.co.uk/virtual/economy/policy/tools/income/inctaxth4.htm
The four macroeconomic objectives could be achieved if the government will attempt to influence aggregate demand and supply in its econommy. Demand-side policy will be used to influence the different level of aggregate demand in an economy using different policy instruments. While supply-side policy can be used to boost productive potential of an economy and increase the aggregate supply of goods and services. The supply side policy instruments are also used to increase employment and increase productivity in both domestic and international markets.
ReplyDeleteThe two types of demand-side policies are fiscal and monetary policy. Fiscal policy involves government’s help with the level of public expenditure and taxation in an economy to manage the aggregate demand. When the aggregate demand is greater than aggregate supply, Contractionary fiscal and monetary policy will be present in order to decrease the aggregate demand. Government could either decrease the public expenditure and cause a decrease in each individual’s wages or increase the taxes in order to reduce each person’s income (fiscal) these will make them hard to purchase the good/supply. An increase in interest rate will reduce borrowing and encourage people to save more. Therefore, the people couldnt borrow as much to purchase the good/service. (monetary)
On the other side, expansionary fiscal and monetary policies are needed to increase the aggregate demand when the aggreegate supply is greater than aggregate demand. In this case government could increase the public expenditure where the wages of individual will be increased (fiscal) or decrease the tax so that the total income of each individual will increase (fiscal). Interest rate could also be reduced in order to increase the borrowings of each individual. If the individuals could borrow more, then they will be able to purchase the goods or services. (monetary)
Yet, some problems could still appear if we use fiscal policy. First, fiscal policy is cumbersome to use (the general level of prices will rise if aggregate demand expands faster than aggregate supply of goods and services). In increasing public expenditure, government will sometimes eneed to borrow money from private sector. Increasing taxes on income and profits might reduce the employees’ work effort. This is because they will receive lower wages since the firm will need to pay higher amount of tax.
So government shall think before applying the fiscal policies in the demand side policies.
The number of supply a firm could produce can also be controlled. The supply-side policies could be applied in this. Supply-side policies include selective tax incentives which is done by lowering the tax. Cutting taxes on earnings and profits can therefore have positive impact on the effort of workers and firms. Selective subsidies could also be given to fund inveestments in new technologies. This will create a technological advance and therefore the cost will be lower and new high tech product could be created with high demand.
Improving education and training can also be affective in increasing supply. An improvement in education will make an access to highly trained and skilled workers. A well-educated workers can increase the production of each labour and this will also lead to an improve in the product’s technology.
Laws and regulation to reduce the complaints of trade unions to take actions in wages increases should also be introduced so that rather than increasing each individual’s wages, government can use the money to do some researches and developments or to buy resources to produce more.
And last one, privatization, shall also be done in increasing supply in economy. This could be done in several ways. One of the ways is by turning from a public transportation to a private one, but with the same price. This will give the consumers benefit in using a better service with same price and taxes can be lowered too.
In my opinion, both policies are affective in helping the government to achieve all the macroeconomy objectives. Both are needed since both of the types have different uses and different ways shall be done to achieve all the objectives.
ReplyDeleteFiscal and monetary policies are needed in order to keep low and stable inflation., high and stable employment and economic growth. But selective tax incentives, subsidies and other supply side policies are also needed for all these. If we decrease the tax, increase subsidies, introducde some new laws and do privatization, supply could be increased. The supply-side policies are all about increasing the productivity in a country.
Originality: 90%
Source: mind and book
First of all, the definition for policy instruments are some methods used by governments to achieve a desired effect. There are two types of policy instruments, first is fiscal policy or that we can say as demand side of policy, and the second one is the monetary policy or the supply side of the policy. If fiscal policy is the use of government revenue collection and expenditure to influence the economy, or else it involves the government changing the levels of taxation and government spending in order to influence Aggregate Demand and the level of economic activity. If monetary policy is the process where the monetary authority of a country controls the supply of money, usually they are targeting a rate of interest for the purpose of promoting economic stability and growth. there are 4 macroeconomic objective, the first one is full employment or low unemployment, the second one is price stability, the third one is high economic growth, and the forth one is equilibrium balance of payments.
ReplyDeleteBoth demand and supply side are needed to make the economy of the country balance or the demand and supply are equal, no more no less. If the demand side is higher than the supply side, so inflation will happen. If the supply side is higher than the demand side so deflation will happen. If the demand is higher than the supply side, inflation could happen because the reaources are scarce, so they need to increase the price, so that the number of demand will decrease, and if the number of supply is higher than the demand, deflation will happen because they need to decrease the price, so that the number of demand will increase .
For low unemployment and fully employed, they need demand and supply side also. The demand side is the wage rate, if the wage rate is high, there are more people that interested and apply, but the supply side is the job satisfaction, the example of job satisfaction is the company pay you even if you cant come because of sick, or they lend you company car that could be use by you if you still wirk I that company, or give shorter work time.
If the price stability, they need to keep the price equilibrium, so that the price will be stable and will not increase or decrese spontaneously. If the high and stable growth can be achieved by using demand and supply also, if the other objectives are achieved, so the economy will increase also. so when the public expenditure increase, job satisfaction increase, unemployment fall or decrease, and the GDP per capita will increase also, because there are more people that work.
The conclusion is that the government need both demand and supply side to achieve the macroeconomic objectives. Unique content: (based on smallseotools.com) 98% References:-http://en.m.wikipedia.org/wiki/Macroeconomic_policy_instruments
-http://en.m.wikipedia.org/wiki/Monetary_policy
-http://en.m.wikipedia.org/wiki/Fiscal_policy
-http://www.tutor2u.net/economics/content/topics/macroeconomy/government_policy.htm
Government have 4 main objectives which is:
ReplyDelete-Low and Stable inflation
-High and sustainable Economic growth
-High and stable employment
-High and stable BOP(Balance of Payment)
And also there are 2 policy instruments which is :
- The supply side policy instrument
-And the demand side policy instrument
and these policy instruments have their own objectives and ways to help reach the objectives.
The demand side policy instruments can help reach the objectives by, increasing tax on goods
that has the highest demand such as:petrol here in Jakarta and also on cigarettes which is a goods with very high demand, this helps by giving more tax to the government so that it can spend it on increasing on economic growth of the country, secondly the government can decrease the tax on a certain good to encourage people to buy the goods that have low demand .
The supply side policy instruments can help reach the objective by reducing tax rates including income and corporate tax, because lower income tax can mean an incentive for unemployed labor to join the labor market, or to encourage workers to work harder, and lower corporate tax can encourage new entrepreneurs to start their business and increase national output. and secondly, measures to improve labor mobility will also have a positive affect on labor productivity and on supply side performance,this also improve labor market flexibility , thirdly by doing human capital development, spending on training of labor can help increase labor productivity and is an essential for the supply side policy instrument, and also favored by the recent UK government.
As a conclusion to our discussion, both demand and supply policy instrument both helped government reach the 4 objectives, even though sometimes the policy fail to do it's job, the policy helped the government reach the objectives.
References:
- Economics notebook and textbook
-http://www.economicsonline.co.uk/Global_economics/Supply-side_policies.html
-http://www.theguardian.com/business/economics-blog/2013/mar/21/tax-increases-economic-crisis
100% originality based on: (smallseotools.com)
Government to influence aggregate demand and aggregate supply to achieve macroeconomic objectives for low and stable inflation, high and stable employment, economic growth and balance of payment uses policy instruments. Two main forms of policy instrument are demand-side policy and supply-side policy. Demand-side policy is used to affect aggregate demand, while supply-side policy is used to affect aggregate supply.
ReplyDeleteDemand side policies are policies used to influence aggregate demand by using monetary policy and fiscal policy. Aggregate demand includes consumers spending, government spending, investment, imports and exports. Monetary policy deals with changing in interest rates and money supply. And fiscal policy deals with changes in taxation and government spending. Demand-side policies are usually used for short-term changes.
When there is inflation caused by too much aggregate demand and high unemployment cause by lack of demand, fiscal policies can be use effectively to solve these problems. Two types of fiscal policy can be used – expansionary fiscal policy and contractionary fiscal policy.
Expansionary fiscal policy is used when there is unemployment caused by lack of demand. Aggregate demand can be increased which eventually will also increase employment by reducing taxes charged. Cutting taxes will create an increase in the amount of income they will receive, and it may encourage employees to increase their productivity. Expansionary fiscal policy is best fitted during the recession of an economy. However, when taxes are reduced, public revenue will decrease and if public expenditures are higher than revenues, government will need to borrow money.
Contractionary fiscal policy can be used to solve inflation cause by too much aggregate demand or increasing prices. Contractionary fiscal policy works by lowering aggregate demand by increasing taxes charged. However taxes can be charged high and the policy may lead to employment and decreases in outputs. This policy is usually used during high-growth periods of an economy, and will not have effects on a short period of time.
To help achieve economics objectives, the government to increase or decrease the money supply can use monetary policy. Monetary policy is used to increase or decrease interest rate to affect economic activities. Government can also use the policy for balance of payment and stable international trade.
Government to increase aggregate demand decreases interest rates and increases money supply using expansionary monetary policy. By doing so, it may reduces unemployment and rising in economic growth. Quantitative easing can boost money supply as well as aggregate demand. Expansionary monetary policy is used during recession.
Excessive growth in money supply causes inflation. Contractionary monetary policy can be used to solve high inflation by increasing interest rates charged or reducing money supply that may lead to a reduce in aggregate demand. When interest rates increased, borrowing rate will be higher, which will discourage people to spend money on goods on services. However, this may cause greater unemployment if demand falls.
While supply side policies used to influence aggregate supply. It boosts the aggregate supply of goods and services so that it can satisfy aggregate demand. Aggregate supply includes in the supply of consumer goods, capital goods, public goods and merit goods. Supply side policies are used for long-term changes for an economy. Supply side policies are more to microeconomic policies to improve the supply side of an economy.
ReplyDeleteThere are tools used by supply side policy so that aggregate supply can satisfy aggregate demand. Lowering taxes charged is one of the way. Reducing taxes will encourage workers to work harder with longer hours and be more productive. Cutting tax has positive effects for both employees and the firm. Reducing unemployment benefits can also be done. A reduction in unemployment benefit will encourage those working for part-time jobs to have full-time jobs.
This policies are designed to improve the quality and quantity of the supply of labor available to the economy. Supply side policy had education and skill training to increase employees’ productivity, which may increase job satisfaction. Government may help firms by designing training programs, funding university, and better access for people to receive education to help train the employees.
As the conclusion, both supply side and demand side policy will or will not be effective on achieving macroeconomic objectives, depending on how both policies are managed and used. Demand side policy won’t always be effective, but I can say that it is more effective than supply side policy as supply side policy are mainly microeconomic policy designed.
Originality: 98%
References:
1. Economic textbook
2. http://www.slideshare.net/ajmccarthynz/34-demand-and-supply-side-policies
ReplyDeletePolicy instruments are the tools or matter, which is undertaken by the government to achieve macroeconomics objectives. These policy instruments are divided into two, demand-side policies and supply-side policies. Both of these policies are used when there is economic recession and prosperity.
The demand-side policies control the level of aggregate demand in an economy using different policy instruments including total public expenditure, the overall level of taxation and the rate of interest. Demand-side policies are of two parts, fiscal policy and monetary policy.
Fiscal policy involves differing the general level of public expenditure and taxation in an economy to control aggregate demand and the level of economic activity. Monetary policy involves variation in the money supply and interest rate in an economy to control the level of economic activity and aggregate demand.
Expansionary fiscal policy is used when the government aims to increase aggregate demand. Government uses this policy instrument with an expectation of boosting employment and output as it will expand its expenditures and decrease taxation. Taxes on profits could be cut which will provide business with a motivation to increase its output or investments. Cutting taxes o personal salary may persuade people to work harder an inspire workers to increase their productivity. This will expand the amount of disposable income people have or are able to spend. However, there might be a chance of saving the extra money on imported goods and services.
Expansionary monetary policy involves reducing the interest rate and increasing the money supply to improve aggregate demand. When interest rate, borrowing will be cheaper and people are less likely to save money. This will help boost consumer expenditure on goods and services and expand investment expenditure. It could help increase output and employment opportunities. Expanding money supply by printing more money will allow people and firms to spend more money on goods and services.
Deflationary or contractionary fiscal policy targets at a reduction of pressure on prices by decreasing aggregate demand. Cutting aggregate demand can be done by, reducing public expenditure, reducing subsidies and increasing total taxation. When taxes increase, disposable income reduces and demand falls. Despite the advantages, there might be a risk of having to reduce employment and growth in output.
Contractionary monetary policy involves increasing interest rate and reducing money supply to reduce aggregate demand. Boosting the interest rate will make borrowing more expensive and decreasing the quantity of money will restrict the amount of money consumers and firms are able to spend on such goods and services. This can be done through selling bonds of the government’s to banks, which will decrease the amount of money banks may have to lend. However, decreasing aggregate demand will increase unemployment and may be unable to grow economically.
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ReplyDeleteSupply-side policies aims to boost economic growth and increase aggregate supply. Expanding aggregate supply will reduce inflation and increase production of goods and services for exports.
ReplyDeleteSelective subsidy, a form of financial help paid to an economic sector by a government to help meet their costs. Subsidies can be used to expand output and reduce market price. Technological advance can boost the efficiency of production, create new products to sell and lower costs.
Rules and laws that restrict certain activities can be referred as regulations. Occasionally, laws and regulations can boost production costs. These extra costs will decrease profits. New regulation has a benefit of increasing sales. Though following regulations can be costly, deregulation will help removes burden on business, cutting production costs and free up resources.
Privatization involves the transfer of public sector activities to private firms who provide them more efficiently. When private firms deliver public goods and services at a lower cost with better quality than public sector, in that case consumers are benefited and taxes can be reduced. Despite this advantage, there might be a drawback of a hike in prices.
Education and training should be improved, as when employees are highly educated with more skills, they may be more productive to compete with firms in the international market. Thus a trained worker can keep up with the advanced technology and can increase labor productivity. Also, they will be able to adapt with new production methods and technologies. The government can help by design more training programs, funding universities and many more.
High rates of tax on personal salary might discourage workers to work hard, especially when they seek to have generous welfare payments. When high tax rates are imposed on profits, incentives of entrepreneurs will be reduced to either start a new business or increasing the scale of existing firms. So, reducing tax on income and profits leads to a positive impact on consumers and firms.
Restrictions on the supply side of labor will force up the wage of the market and may result to lesser jobs, this can be placed with laws and regulations to reduce the powder of the trade unions to take strike action and demand unreasonable salary increases for their members.
Different polices give advantages in achieving the macroeconomics objectives, however some leads to drawbacks. Both of them can be used differently. Thus, demand side policy instruments are not always more effective than supply side policies.
References:
Economic Textbook
Notebook
Originality: 94%
Monique 8C
Government want to have control on business activities because every of the activities have benefits and losses which will impact the economy. There are reasons why government wanted to have control over the business activities. Benefits. Government wants production of goods that are useful to satisfy needs and wants for consumers, create more employment or increase in standards of living for workers, introduce products that are new which will reduce cost and also be provided a wider range of products, taxes which will help production of public goods and public services, and so that business may earn foreign currency in exports and this could be spent on imports.
ReplyDeleteBut there can also be possible effects that are undesirable when government has control over business activities. Business might ruin cheap but beautiful areas, more works that are unsafe and decrease in amount of wages since business wants to lower their production cost, more pollution, increase in production of dangerous goods, advertising which may mislead the consumers, monopolies, and etc.
All Government has their own aims for their own country. Government policies are needed because these policies can achieve the government aims or objectives. There are 4 objectives and aims of government. They are low rate of inflation, low rate of unemployment, balance of payment, and stable economic growth in the country.
Low rate of inflation. Inflation is the term when price rises. Government wants to keep the rate of inflation as low as possible because inflation leads to many disadvantages. Worker’s wages buy less than before which leads to a fall on the workers’ real income. When inflation happens in a country, price of local goods or goods from their own country will increase more than price of international goods or goods from outside of the country which will lead to more consume of imports. Cost for startup of business will increase, and people’s standards of living will fall.
Low level of unemployment. Government wants to keep the rate of employment in the country as low as possible to decrease undesirable effects such as a decrease in national outputs because of less employment and that government will have to pay cost for unemployment benefits in the country, which is expensive.
Stable economic growth. A country is growing when its GDP (gross domestic product) is increasing. Gross domestic product is the total goods that are produced in a year in a country. When economic growth increases, standards of living will also tend to increase. When the gross domestic product fall, problems will tend to arise. The country’s output decreases, a fall in business standards of living, business won’t be able to expand because the business has less money for invest, and etc.
Balance of Payments. Exports earn foreign currency, while imports are paid for by foreign currency (or vice versa). The difference between the value of exports and imports of a country is called balance of payments. Governments try to achieve a balance in imports and exports to avoid a trade deficit, when imports are higher than exports. Of course, the government will lose money and their reservoir of foreign currency will fall. This leads to more borrowing in the country and the countries own currency may worth less.
DeleteTherefore, government has policies to solve these problems. There are 2 main policies. Demand side policies and supply side policies. The difference between these 2 main policies (the demand side policy and the supply side policy) is that demand side policy focuses to influence the level of aggregate demand. While the supply side policy aims to increase the level of aggregate supply of goods and services in an economy. There are 3 types of demand side policies. They are expansionary fiscal policy, contractionary fiscal policy, and fiscal policy instruments the can affect distribution of income.
Using fiscal policy can be a disadvantage. It is cumbersome to use this policy. Fiscal policy makes an increase in public expenditure crowds out private spending. There will be increasing taxes on incomes and profits. There is also monetary policy. Monetary policy involves changes in the money supply and/or interest rate in an economy to influence aggregate demand.
Supply side policies instruments include selective tax incentives, selective subsidies, improving education and training, labor market reforms, competition policy, removing trade barriers, and privatization.
Kevin 8C
Originality: 95%
Source: notebook and textbook
Demand side policy and supply side policy are both the policy instruments used by the governments to gain their four main objectives.
ReplyDeleteDemand side policy only aims to influence the level of aggregate demand. The demand side policy uses the total public expenditure, the overall level of taxation, and the rate of interest. Demand side policy instruments can be effective because the amount consumers have to spend on goods and services depends on their level of disposable income after income taxes have been deducted, taxes on profits will affect the amount of money firms have to invest in new productive capacity and their demand for labour, increasing public expenditure can boost total demand and, therefore, stimulate higher output and employment in an economy, and as interest rates rise consumers may save more and borrow less, this may attract new investments from overseas and will make a stable balance of international trade and payments in the country.
In contrast, the supply side policy only aims to boost the aggregate supply of goods and services in an economy. Supply side policy instruments are used to reduce barriers to increased employment and higher levels of productivity in domestic and international markets and to create the right incentives for firms and workers to increase their output. Supply side policy instruments will include specific public expenditures, changes to individual taxes, and new regulations and reforms. Supply side policy instruments therefore target the behaviors of specific groups of consumers and producers in a particular markets to achieve the economic objectives of government.
DeleteThe four macroeconomic objectives are low and stable rate of inflation, high and stable employment, economic growth in national output, and a stable balance of international trade and payments. These all objectives needs to be achieved by the government and the government will need some help from the policy instruments which are the demand side policy instruments and supply side policy instruments. These objectives must be achieved in order for the country to be a more economically developed country (MEDC).
The demand side policy will increase the public expenditure that can boost total demand; therefore, it can give higher output of a firm and employment in an economy. This will help the government in achieving the objectives of high and stable employment. A higher employment is caused by the increase of public expenditure or government spending which is again the effect of using a demand side policy instrument. The demand side policy can also has affect in the interest rates. As the interest rates rise consumers may save more and/or borrow less to spend on consumer goods and services. This may also encourage investments from overseas. This will have effect on the government on achieving the objectives to get a stable balance of international trade and payments. The demand side policy wills also helps to reduce the taxes on profits of firms. When the tax from profits has been reduced, the firms can invest in new productive assets or capital which means the total spending will be increased. This will has effect in the economic growth in national output.
The supply side policy also has effect or helps the government in achieving their macroeconomic objectives. Boosting the supply of goods and services in an economy will help to raise the rate of economic growth and employment, increase the supply of exports and reduce inflationary pressures because more goods and services will be available to satisfy aggregate demand. The supply side policy will help the government to achieve their four main macroeconomic objectives, which are the high and stable employment, low and stable rate of inflation, a stable balance of international trade and payments, and economic growth in national output.
For me supply side is more effective in helping the government to achieve all their objectives because supply side policy instruments can help the government in achieving all the macroeconomic objectives of the government while demand side policy instrument only can help the government in achieving three main government’s macroeconomic objectives which are the high and stable employment, economic growth in national output, and a stable balance of international trade and payments.
In conclusion, there are two main policy which are the demand side policy instruments and supply side policy instruments where the government can use in order to achieve the four main government’s macroeconomic objectives which are the low and stable rate of inflation, high and stable employment, economic growth in national output, and a stable balance of international trade and payment. The government can use both of the policy instruments because they are very helpful for the government in achieving their four main objectives.
Fernando 8C
Originality: 95%
Resources: - Economics Textbook
- Economics Corner Notebook
- businessdictionary.com
Both demand side policy and supply side policy are made to solve the macroeconomic problem which are low and stable inflation, high and stable employment, high and sustainable economic growth, and also international trade and balance of payment. In order to achieve these objectives, government can apply either demand side policy instrument or supply side policy instrument. Demand side policy is AD and supply side policy is AS
ReplyDeleteThere are some ways for the demand side policy instrument to reach the objectives. The first is by increases tax on goods that many consumers want to buy. By giving tax it will decrease the demand of consumers and objectives achieve. The second is by giving off subsidies to the consumers. Subsidies are given to increase the demand when supply is high. However, tax is given when supply is low. . It can be used to cut total demand when the demand is too high.
This is contractionary demand side policy which is used to lowered the demand so the inflation rate will be not to high because the demand is less than the supply. it will be dangerous to the country because less people buy the product and producers start to fired labour
And in the other side of demand side policy there is expansionary demand policy which is use to increase aggregate demand so that unemployment will be decrease government will decrease the tax of good so many consumer will buy the product and producers will hired more labour so job is available . The second way is government increase public expenditure like built more toll roads and other thing , public goods. The advantage is there will be economic growth because many labour was hired and the income of the labour will increase because there is many demand but the disadvantages is there will be inflation because the supply is rare so the goods price will increases
The supply side policy instrument can also help the government to reach the objectives. The first way that government can use is by also giving incentive to the supplier. When demand is high, government can increase the supply by giving incentive for example lowering the tax or tax holiday no income tax so labour will worked or available so this is also reduce unemployment and give some rules like every Friday we need to use batik so many people will start buying batik and many batik producers avaible this making the economic growth high. The second is by providing better education and health . It will increase the supply of the services when there is a great demand. The third is by improving labour mobility. Labour skill will have a positive effect on labour productivity and on supply-side performances
In my opinion both policy is very useful to achieve the four main objective because both can solve the objective by their own policy we can't say the demand side policy is better than the supply because if only demand increase but no supply how to buy the goods inflation rate will be so high. And if we say the supply side policy is better than the demand side policy is also wrong because if we have many supply without demand it will be useless and recession happen
Sources:
Economic textbook
Economic book
Fiscal Policy involves varying the overall level of public expenditure and/or taxation in an economy to manage aggregate demand and influence the level of economic activity. Demand side policies are policies that the government creates to try to influence the level of agregate demand in an economy using a number of different policy instruments . These are:
ReplyDeleteTotal Public Expenditure , the overall level of taxation , and the rate of interest . These demand-side policies instruments can be effective for these reasons :The amount consumers have to spend on goods and services depends on their level of disposable income after income taxes have been deducted . Taxes on profit will affect the amount of money firms hve to invest in new productive capacity and their demand for labour . Increasing public expenditure can boost total demand and, therefore, stimulate higher output and unemployment in an economy . And as interest rates rise consumer may save more and/or borrow less to spend on consumer goods and services.
Supply-side Policies aim to boost the aggregate supply of goods and services in an economy. Boosting the supply goods and services in an economy will help to raise the rate of economic growth and unemployment, increase the supply of exports and reduce inflationary pressures because more goods and services will be available to satisfy aggregate demand. Supply-side policies instruments are used to reduce barriers to increased employment and higher levels of productivity in domestic and international markets and to create the right incentives for firms and workers to increase their output . Supply-side policy instruments will include: Specific public expenditures, for example providing governments subsidies to firms to encourage them to fund the R&D of new and more efficient production processes and products . Changes to individual taxes, for example reducing taxes on wages and profits to increase the reward from work and enterprise . New araegulations and reforms , for example introducing legislation to outlaw unfair and anti-competitive practices by large, powerful firms
Supply-side policy instruments therefore target the behaviours of specific groups of consumers and produces in particular markets to achieve government objectives .
Macroeconomics is the study of how a national economy works . It involves understanding the interaction between charges in total demand and output and national income, employment and price inflation in an economy .
In some Demand-Side Policies (DSP) , such as expansionary fiscal policies , it uses cutting taxes on profits , so that may provide firms with an incentive to increase output and investments in new productive capacity . Cutting taxes on personal incomes may encourage more people to participate in the workforce and motivate employees to increase their productivity . It will increase the amount of disposable income people have to spend . So then , there will be a fast growth in the country . And sometimes , government uses Expansionary Fiscal Policies in times of recession . That is a part of the advantages for DSP .In other hand , Contractionary Fiscal Policies (a part of DSP) aims to reduce pressure on prices (that could lead to inflation) in the economy by cutting aggregate demand through a reduction in public expenditure and/or by raising total taxation.For example , cutting public sector wages and raising personal taxes will reduce total disposable income and consumer expenditure . DSP instruments may also be used to redistribute incomes between rich and poor . For examle , income taxes may be increased on those with the highest incomes and the money raised to finance more public services and increased welfare for people on te lowest incomes ,or those unabled to work in terms of conditions. Also, taxing people on high incomes to provide income support to people on low incomes can also hepl to boost overall spending in the economy . This is because people on High incomes tend to save a large proportion of their incomes while people on low incomes tend to spend all or most of their incomes on goods and services they need.
ReplyDeleteBut DSP also had the disadvantage , such as it is very cumbersome to use . It is difficult for a government to know precisely when and by how much to expand public spending or cut taxes by during an economic downturn. Boosting aggregate demand by increasing public spending and/or cutting taxes may cause an economy to 'overheat' : the general level of prices will rise if aggregate demand expands faster than aggregate suppy of goods and services . Also , there will be an increasing of public expenditure crowds out private spending . To Finance an increase in public spending and/or a cut in taxation a government may need to borrow the extra money it nees from the private sector . The more money the private sector lends to a government the less it has available to spend itself . This is called crowding crowd . Thirdly Increaing taxes on incomes and profits can reduce incentives to work and enterprise . If taxes are too high , people and firms may reduce their work effort . This will reduce labour productivity , total output and profits . As productivity falls the cost of production in many firms will incease and they will be less able to compete on product price and quality againts more efficient producers overseas. As a result , the demand for their goods and services may fail and unemployment may rise . Lastly , An expansionary fiscal policy creates expectations of inflation . Consumers and producers in an economy may come to expect a future rise in inflation following an expansionary fiscal policy , especially if attempts by their government in the past to boost demand and economicactivity have caused the economy to overheat . As a result , if their current government announces it will cut taxes and increase public spending to boost output and growth employees may push for higher wages now to protect them from an increase in their cost of living they fear will occur in the future. Rising wages will increase production costs and reduce the demand for labour. This in turn may cause a cost-push inflation and rising unemployment .
And sir , there still more than that in a few moments
DeleteSupply side policy includes any policy that improves an economy’s productive potential and its ability to produce. There are several individual actions that a government can take to improve supply-side performance. Measures to improve factor productivity, which is the marginal output generated by factors inputs, include the following:Using the tax system to provide incentives to help stimulate factor output, rather than to alter demand, is often seen as central to supply-side policy. This commonly means reducing direct tax rates, including income and corporation tax. Lower income tax will act as an incentive for unemployed workers to join the labour market, or for existing workers to work harder. Lower corporation tax provides an incentive for entrepreneurs to start and so increase national output.Other supply-side policies include the promotion of greater competition in labour markets, through the removal of restrictive practices, and labour market rigidities, such as the protection of employment. For example, as part of supply-side reforms in the 1980s, trade union powers were greatly reduced by a series of measures including limiting worker's ability to call a strike, and by enforcing secret ballots of union members prior to strike action.Measures to improve labour mobility will also have a positive effect on labour productivity, and on supply-side performance. This improves labour market flexibility.Better education and training to improve skills, flexibility, and mobility – also called human capital development. Spending on education and training is likely to improve labour productivity and is an essential supply-side policy option, and one favoured by recent UK governments. A government may spend money directly, or provide incentives for private suppliers to enter the market. Government may also set and monitor standards of teaching, and force schools to include a skills component in their curriculum.The adoption of performance-related pay in the public sector is also seen as an option for government to help improve overall productivity. Government can encourage local rather than central pay bargaining. National pay rates rarely reflect local conditions, and reduce labour mobility. For example, national pay rates for Postmen do not reflect the fact that in some areas they may be in short supply, while in other areas there may be surpluses. Having different rates would enable labour to move to where it is needed most.Measures to improve competition and efficiency in product markets, especially in global markets, are also a significant part of supply-side policy. Example of measures include:
ReplyDeleteGovernment may help to improve supply-side performance by giving assistance to firms to encourage them to use new technology, and innovate. This can be done through grants, or through the tax system.
The advantages of supply side policies are :
ReplyDelete1.Supply-side policies can help reduce inflationary pressure in the long term because of efficiency and productivity gains in the product and labour markets.
2.They can also help create real jobs and sustainable growth through their positive effect on labour productivity and competitiveness. Increases in competitiveness will also help improve the balance of payments.
3.Finally, supply-side policy is less likely to create conflicts between the main objectives of stable prices, sustainable growth, full employment and a balance of payments. This partly explains the popularity of supply-side policies over the last 25 years.
The disadvantages of supply side policies are:
1.However, supply-side policy can take a long time to work its way through the economy. For example, improving the quality of human capital, through education and training, is unlikely to yield quick results. The benefits of deregulation can only be seen after new firms have entered the market, and this may also take a long time.
2.In addition, supply-side policy is very costly to implement. For example, the provision of education and training is highly labour intensive and extremely costly, certainly in comparison with changes in interest rates.
3.Furthermore, some specific types of supply-side policy may be strongly resisted as they may reduce the power of various interest groups. For example, in product markets, profits may suffer as a result of competition policy, and in labour markets the interests of trade unions may be threatened by labour market reforms.
4. Finally, there is the issue of equity. Many supply-side measures have a negative effect on the distribution of income, at least in the short-term. For example, lower taxes rates, reduced union power, and privatisation have all contributed to a widening of the gap between rich and poor.
So My conclusion is that in Macro-economics objectives , it is good both -sides , but the government also has to see the side-effect of those policies . Such as demand-side policies , after recession was healed , and then came inflation , so there is so much we have to think of .
ReplyDeleteSource:
Economics Textbook
www.economicsonline.co.uk/Global_Economics/Supply-side_policies.html