Revision presentation on aspects of supply-side policies and UK international competitiveness

1. SUPPLY SIDE COMPETITIVENESS AND
GROWTH
AS Macro
Session 4

4. 08/04/2014
Loads of Revision Help on Twitter: @tutor2u_econ

5. Reminder of key objectives of macroeconomic policy
Price Stability – i.e. Low
Positive Inflation
A Sustainable Growth of
Real GDP (National
Output)
Falling Unemployment /
Full Employment?
Higher Average Living
Standards (Income per
capita)
Improved Global
Competitiveness / Trade
Balance
A More Equitable
Distribution of Income
and Wealth

6. Reminder of key objectives of macroeconomic policy
Price Stability – i.e. Low
Positive Inflation
A Sustainable Growth of
Real GDP (National
Output)
Falling Unemployment /
Full Employment?
Higher Average Living
Standards (Income per
capita)
Improved Global
Competitiveness / Trade
Balance
A More Equitable
Distribution of Income
and Wealth

7. Reminder of key objectives of macroeconomic policy
Price Stability – i.e. Low
Positive Inflation
A Sustainable Growth of
Real GDP (National
Output)
Falling Unemployment /
Full Employment?
Higher Average Living
Standards (Income per
capita)
Improved Global
Competitiveness / Trade
Balance
A More Equitable
Distribution of Income
and Wealth

8. Reminder of key objectives of macroeconomic policy
Price Stability – i.e. Low
Positive Inflation
A Sustainable Growth of
Real GDP (National
Output)
Falling Unemployment /
Full Employment?
Higher Average Living
Standards (Income per
capita)
Improved Global
Competitiveness / Trade
Balance
A More Equitable
Distribution of Income
and Wealth

9. Reminder of key objectives of macroeconomic policy
Price Stability – i.e. Low
Positive Inflation
A Sustainable Growth of
Real GDP (National
Output)
Falling Unemployment /
Full Employment?
Higher Average Living
Standards (Income per
capita)
Improved Global
Competitiveness / Trade
Balance
A More Equitable
Distribution of Income
and Wealth

10. Reminder of key objectives of macroeconomic policy
Price Stability – i.e. Low
Positive Inflation
A Sustainable Growth of
Real GDP (National
Output)
Falling Unemployment /
Full Employment?
Higher Average Living
Standards (Income per
capita)
Improved Global
Competitiveness / Trade
Balance
A More Equitable
Distribution of Income
and Wealth

17. Key Supply-Side Challenges for the UK Economy
Persistent
Productivity Gap
High youth
unemployment
Deep regional
economic divide
Structural trade
deficit (BoP)
Low trend growth
of GDP
Rise of Emerging
Nations
Low investment &
research spending
Rising inequality /
relative poverty

18. Key Supply-Side Challenges for the UK Economy
Persistent
Productivity Gap
High youth
unemployment
Deep regional
economic divide
Structural trade
deficit (BoP)
Low trend growth
of GDP
Rise of Emerging
Nations
Low investment &
research spending
Rising inequality /
relative poverty

19. Key Supply-Side Challenges for the UK Economy
Persistent
Productivity Gap
High youth
unemployment
Deep regional
economic divide
Structural trade
deficit (BoP)
Low trend growth
of GDP
Rise of Emerging
Nations
Low investment &
research spending
Rising inequality /
relative poverty

20. Key Supply-Side Challenges for the UK Economy
Persistent
Productivity Gap
High youth
unemployment
Deep regional
economic divide
Structural trade
deficit (BoP)
Low trend growth
of GDP
Rise of Emerging
Nations
Low investment &
research spending
Rising inequality /
relative poverty

21. Key Supply-Side Challenges for the UK Economy
Persistent
Productivity Gap
High youth
unemployment
Deep regional
economic divide
Structural trade
deficit (BoP)
Low trend growth
of GDP
Rise of Emerging
Nations
Low investment &
research spending
Rising inequality /
relative poverty

22. Key Supply-Side Challenges for the UK Economy
Persistent
Productivity Gap
High youth
unemployment
Deep regional
economic divide
Structural trade
deficit (BoP)
Low trend growth
of GDP
Rise of Emerging
Nations
Low investment &
research spending
Rising inequality /
relative poverty

23. Key Supply-Side Challenges for the UK Economy
Persistent
Productivity Gap
High youth
unemployment
Deep regional
economic divide
Structural trade
deficit (BoP)
Low trend growth
of GDP
Rise of Emerging
Nations
Low investment &
research spending
Rising inequality /
relative poverty

24. Key Supply-Side Challenges for the UK Economy
Persistent
Productivity Gap
High youth
unemployment
Deep regional
economic divide
Structural trade
deficit (BoP)
Low trend growth
of GDP
Rise of Emerging
Nations
Low investment &
research spending
Rising inequality /
relative poverty

25. 08/04/2014
Loads of Revision Help on Twitter: @tutor2u_econ

26. Analysis
Evaluation
Application
Good application opens the door to
good analysis and good evaluation
7:49:36

27. Long run supply side growth
• Analysis - Identify 3 policies
that might boost the supply
side of the UK economy in
the long term
• Evaluation – What factors
might limit the effectiveness
of your suggestions?

28. Improving labour supply
Analysis
• A labour shortage is
often a reason limiting
the economy’s scope
for growth
• Additional labour can
be obtained from
overseas, or by boosting
participation rates of
the native UK labour
force.
Evaluation
• Immigration is politically
controversial – depends
on nature of migration
• Tax and welfare systems
can create disincentives
for people to take paid
work

30. Longer Term Dynamic Effects of Migration
Labour Market Fiscal Effects
Consumption Competitiveness
Waves of inward migration can have structural effects on a
country’s macroeconomic performance
Increase in the
labour supply
which might cause
lower unit labour
costs for host
country
Inward migration
increases pressure
on govt spending
but will also lead
to rising tax
revenues
• Human capital
helps generate
new ideas
• Many migrants
start businesses –
possible exporters
• Knowledge
spillovers
• Increase in
population size
• Rising demand
for public services
• If housing stock
is fixed, can lead
to higher prices
and rising rents

31. Longer Term Dynamic Effects of Migration
Labour Market Fiscal Effects
Consumption Competitiveness
Waves of inward migration can have structural effects on a
country’s macroeconomic performance
Increase in the
labour supply
which might cause
lower unit labour
costs for host
country
Inward migration
increases pressure
on govt spending
but will also lead
to rising tax
revenues
• Human capital
helps generate
new ideas
• Many migrants
start businesses –
possible exporters
• Knowledge
spillovers
• Increase in
population size
• Rising demand
for public services
• If housing stock
is fixed, can lead
to higher prices
and rising rents

32. Longer Term Dynamic Effects of Migration
Labour Market Fiscal Effects
Consumption Competitiveness
Waves of inward migration can have structural effects on a
country’s macroeconomic performance
Increase in the
labour supply
which might cause
lower unit labour
costs for host
country
Inward migration
increases pressure
on govt spending
but will also lead
to rising tax
revenues
• Human capital
helps generate
new ideas
• Many migrants
start businesses –
possible exporters
• Knowledge
spillovers
• Increase in
population size
• Rising demand
for public services
• If housing stock
is fixed, can lead
to higher prices
and rising rents

33. Longer Term Dynamic Effects of Migration
Labour Market Fiscal Effects
Consumption Competitiveness
Waves of inward migration can have structural effects on a
country’s macroeconomic performance
Increase in the
labour supply
which might cause
lower unit labour
costs for host
country
Inward migration
increases pressure
on govt spending
but will also lead
to rising tax
revenues
• Human capital
helps generate
new ideas
• Many migrants
start businesses –
possible exporters
• Knowledge
spillovers
• Increase in
population size
• Rising demand
for public services
• If housing stock
is fixed, can lead
to higher prices
and rising rents

34. Longer Term Dynamic Effects of Migration
Labour Market Fiscal Effects
Consumption Competitiveness
Waves of inward migration can have structural effects on a
country’s macroeconomic performance
Increase in the
labour supply
which might cause
lower unit labour
costs for host
country
Inward migration
increases pressure
on govt spending
but will also lead
to rising tax
revenues
• Human capital
helps generate
new ideas
• Many migrants
start businesses –
possible exporters
• Knowledge
spillovers
• Increase in
population size
• Rising demand
for public services
• If housing stock
is fixed, can lead
to higher prices
and rising rents

35. Improving labour mobility
Analysis
• The UK housing market
often makes it difficult
to overcome problems
of geographical
immobility of labour
• Big differences in house
prices and poor
transport links prevent
labour movement
Evaluation
• Tackling the housing
market and transport
infrastructure problems
Britain faces is a huge task
• Interventions are often
hugely expensive with
significant time lag
problems

36. Improving
labour productivity
Analysis
• It’s vitally important that the
UK doesn’t just have more
labour, but better labour –
that can produce higher
value output
• Investment in skills, training
and equipment are all
possible routes to higher
productivity
Evaluation
• This is a long term
problem that can take a
generation to tackle.
• Who is responsible?
Firms or government?
• Who should pay?

37. Improving
innovation and enterprise
Analysis
• By creating the conditions in
which innovation and
enterprise thrive, new
businesses will start-up,
new products will be
developed and new markets
pioneered
• The greater the incentive,
the bigger the gains
Evaluation
• Tax cuts to incentivise
entrepreneurial wealth
might cause increases in
inequality.
• Innovation often has high
failure rates, making it
hard for governments to
‘pick winners’.

38. Improving infrastructure
Analysis
• Improved infrastructure
could help reduce the
‘bottlenecks’ that prevent
the economy from
expanding
• Improved transport can aid
labour mobility, cheaper
energy reduces costs across
the economy.
Evaluation
• Transport and energy
infrastructure is expensive
and are subject to
significant time-lag effects.
• Infrastructure provision
sometimes conflicts with
other policy goals, such as
reducing environmental
impacts

39. Economic Importance of Infrastructure Investment
Examples of UK infrastructure projects
• 2nd Forth Road Bridge
• Cross Rail and the High Speed Rail project
• London Gateway Port & new London super sewer
• Nuclear power plants including Hinkley Point
Economic significance of infrastructure
• Potentially high multiplier effects from multi-
billion investment projects – boosts AD and jobs
• Lack of infrastructure may discourage FDI
• Increases the capital stock / productive potential

40. Economic Importance of Infrastructure Investment
Examples of UK infrastructure projects
• 2nd Forth Road Bridge
• Cross Rail and the High Speed Rail project
• London Gateway Port & new London super sewer
• Nuclear power plants including Hinkley Point
Economic significance of infrastructure
• Potentially high multiplier effects from multi-
billion investment projects – boosts AD and jobs
• Lack of infrastructure may discourage FDI
• Increases the capital stock / productive potential

41. Examples of UK Government Supply-Side Policies
Privatisation of
Royal Mail
Patent Box
Incentive
Modern
Apprenticeships
Welfare Caps /
Reforms
Shale Gas Tax
Cuts
Corporation Tax
Cuts
National
Infrastructure
Plan
Launch of Green
Investment
Bank

42. To what extent could supply side improvements
improve UK competitiveness?
Knowledge
Application
• Refer to supply side problems that raise UK business costs
and restrict competitiveness
Analysis
• Identify supply side policies and explain how they might
work. Use an AS/AD diagram to show the impact of changes
in AS on real income, and especially the price level.
Evaluation
• Discuss the problems and limitations of supply side policies.
Introduce other factors that influence competitiveness,
such as the exchange rate.

43. 08/04/2014
Loads of Revision Help on Twitter: @tutor2u_econ