AS Macro: Supply Side and 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

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

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

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.

AS Macro: Supply Side and Competitiveness

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