AS Econ session 5

A Level Economics – Year 1 (AS) Revision Workshop
Session 5
Supply side policies and
policy conflicts
42
In this session we are going to focus on the instruments of supply-side
policy, how they have been used in the UK and their implications. We
will also consider how different policies may have caused conflicting
outcomes for the Government’s Economic objectives.

What are supply-side policies?
42
Measures to make labour, product and
capital markets more efficient to boost the
level of productive capacity, moving the
aggregate supply curve rightwards.

Some examples
42
Designed to make labour markets more flexible and boost
labour supply, e.g. cuts in income tax and social security
benefits
Designed to boost investment and add to the capital stock, e.g. tax
credits for R&D, a Green investment bank, cuts in Corporation Tax
Designed to boost competition and efficiency in the market for
goods and services, e.g. privatisation (such as Royal Mail), changes
to Sunday Trading Laws

Changes to Sunday Trading Laws
• Proposed legislation to relax trading laws for Sundays.
• The Government wants to allow local councils to decide if retail
outlets in their region should be allowed to trade for longer (opening
earlier and closing later).
• Opposition comes from those who believe that there are cultural and
religious reasons for limiting trade and from Trade Unions who are
concerned for the impact on their members

The impact of supply-side policies on the
macro economy
43
1
AD
AD1
SRAS
SRAS1
Y Y1
P
P1
Y2

The impact of supply side policies on the
Keynesian aggregate supply curve
43 43

Key supply-side challenges for the UK economy:
43
UK has one of worst productivity levels in the
G7 that has not improved after the financial
crash
12.5% of 18 – 25 year olds are currently
unemployed.
Economic growth has occurred but is lower then
expected (continuing Output gap)
Lower income households are becoming relatively
poorer in comparison to higher earning
households.
Investment levels are low, particularly outside of
South East of England

The Productivity Puzzle
44
Chart illustrates the so-called
‘productivity puzzle’ that
impacts on the UK Economy
Shows the real productivity
index (output per hour,
2007=0) in red and level of
productivity that may have
occurred if improvements in
productivity had continued on
their pre-crisis trend.

The Productivity Puzzle
This lack of continually
improving productivity
is a major concern.
Compounded by the fact that productivity
levels in the UK are worse than all of the
other G7 economies except for Japan.
44
Without improved
productivity the
economy will struggle to
continually grow
One possible cause of the puzzle could be a policy
conflict – the push to create more jobs may have
meant in order to fill the vacancies employers
have had to employ less effective workers.

Evaluation: To what extent is the UK Government’s policy to reduce
unemployment levels a direct cause of low productivity in the economy?
45
Encouragement of employment policies such as Zero Hours contracts.
Employers such as McDonalds and Sports Direct use them
Although workers on Zero hours contracts are not unemployed, they do not
have guarantee paid work in any given week and this can lower employee
motivation.
ONS statistics suggest that nearly 750,000 people are on zero hours
contracts in UK (September 2015)
However, many workers on zero hours contracts are satisfied with their
arrangement and are happy that they have some employment. Survey by
ONS suggests that 65% do not want to work more hours
Encouragement of employment practices such as zero hours contracts has
helped reduce unemployment but may not have improved motivation and
productivity.

Zero Hours contracts at McDonalds

Evaluation: To what extent is the UK Government’s policy to reduce
unemployment levels a direct cause of low productivity in the economy?
45
Low productivity may have been caused by other factors not related to
government policies on employment
Businesses have been able to lower other costs, and as a result have been
able to keep prices low and remain in business, in spite of lower
productivity
Low interest rates have meant that some firms that are less productive have
managed to stay afloat when they would have folded during other
recessions
Skills that have been maintained by ‘over’ employment may support future
levels of productivity
Low levels of productivity exist but are not directly caused by government
employment policies

Research and Development
Although recent years have
seen an increase in spending on
research and development in
the UK it continues to lag
behind many of our
competitors.
The amount of money being put into R&D by UK
business hit £19.9bn in 2014, up from £19.1bn in
2013 at constant prices. This amounted to 1.1%
of GDP.
45
However, South Korea spent 4.1% of GDP on developing new technology and
products, Japan 3.4%, Germany 2.9%, the US 2.7% and France 2.2%. The EU
average was 1.9pc.

What are the key dangers from a lack of
investment in research and development?
45
Economy will struggle to grow unless businesses find
ways of improving productivity
Can lead to lower levels of productivity as employees
fail to get adequate training in new technologies
Reduces the UK’s international
competitiveness

UK Enterprise Zones
Enterprise zones have
been set up in 24
regions within the UK.
The concept is to create regionalised
hubs for promoting growth and job
creation in areas that may have
traditionally suffered from higher
unemployment.
46
In each zone, the organisation specialises in a
particular set of industries that have the potential for
success in that area (e.g. Advanced
Manufacturing/Engineering in Birmingham,
Aerospace in Manchester).
The Government attempts to
attract businesses to the area by
promising advantages such as a
streamlined planning process,
enhanced capital allowances or
improved transport links.

What are the key advantages of developing
Enterprise Zones?
46
An attempt to spread growth throughout regions
that are most in need
Allows for Government to target infrastructure
funding (which needs sufficient time to reap
benefits)
Take advantage of the external economies of scale by
having specialisms in each hub (e.g. Leeds specialises
in Pharmaceuticals)

Examples of possible policy conflicts
46

Conflict between unemployment and inflation
47
Economists will often talk about the
conflict between unemployment and
inflation (see the Phillips Curve).
Traditionally, the concern was that any
monetary or fiscal policy put in place to
reduce prices often required contracting
aggregate demand.
So, increasing interest rates will reduce AD
but as demand falls so will employment as
firms start to lay-off employees who are no
longer needed.

How has this conflict been reflected in the
statistics?
47
- -3% -0.5%
2% -0.6%
1% -1.5
1% -0.4
Analysis: Statistics here show an apparent conflict. However, inflation rate
remains very low and is not accelerated by the change in unemployment. Conflict
not apparent in last 5 years.

UK Economic Growth and the Balance of
Payments Current Account
47
Economists suggest that
there is a trade-off between
economic growth and the
balance of payments current
account. A positive
economic growth suggests
that people have higher
incomes– in the UK as people
earn more money they will
tend to purchase more
imported goods. Thus,
economic growth may lead
to a larger deficit on the BoP
Current Account.

Policies aimed at improving growth and trade
balance
47
Govt’s ‘Export Hub’ – series
of roadshows giving advice
to exporting businesses
The Exchange Rate!
By keeping interest rates
low, less demand for
GBP
Is there demand in
the importing
economies?
Intercity Express
Programme (to replace
old inter-city rolling
stock)
Price of petrol (as
car use is a
substitute)

Paris Climate Summit 2015
All of the major economies of
the world met and discussed
the issue of climate change in
Paris in November 2015.
At the end, each government agreed to new targets to
reduce carbon emissions and attempt to limit the rise
in average world temperatures to less than 2 degrees.
48
The EU bloc of nations produces
9% of the world’s greenhouse
emissions with only China and the
USA polluting more.
The UK will start to formulate new policies to meet the
agreed targets but these will include further measures
of taxes on polluting firms/products, incentives for
firms using or developing greener technology and
greater regulation on polluting firms/consumers.

Suggest 2 new policies that the government could
introduce to reduce greenhouse emissions in the UK:
48
Building Data Exchange – a
Government information portal
giving data to construction
industry to help them build
more environmentally sound
homes and offices.
‘Contracts for Difference’ –
offering more contracts to
energy firms who are
investing in carbon reducing
methods and technology.

Evaluate the view that further measures by the UK Government aimed at
reducing greenhouse emissions will always lead to lower economic growth.
48
Carbon releasing fuels are the most cost effective
Renewable energy (e.g. solar energy) tends to be more expensive than carbon releasing fuels,
leading to an increase in production costs for businesses which switch to the ‘green fuels’. As a
result they will be less competitive
The US Dept of Energy produced figures in 2015 which show that wind and solar energy can be
twice as expensive per kilowatt/hour as coal and natural gas. Carbon fuels remain the primary
method of generating electricity in the UK (47% generated)
However, as investment made in generation of renewable energy increases, the cost of producing
those fuels should full
Therefore the change in costs may not have any affect on economic growth in the long run.

Evaluate the view that further measures by the UK Government aimed at
reducing greenhouse emissions will always lead to lower economic growth.
48
Cost of using fossil fuels does not fully take into account the cost of their externalities
Fossil fuels give out greenhouse emissions causing global warming and externalities such as
increased flooding
IMF suggest that as many as 1.6mn people die per year in the world from premature deaths caused
by polluted air
However, the cost of supporting the development of cleaner energy may be very high in the short
term
A concentration of policies to reduce greenhouse emissions may support sustainable economic
growth in the long run as there will be fewer costs in terms of externalities

Extension
activities
50

Top Tips
53

Micro and
Macro
Glossary
57

Have a safe journey home!
Good luck with your exams
from everyone at tutor2u
www.tutor2u.net/asecon2016.pdf

AS Econ session 5

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