AS Macro: Supply Side and Competitiveness

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Revision presentation on supply side problems and policies in the UK

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AS Macro: Supply Side and Competitiveness

  1. 1. SUPPLY SIDE COMPETITIVENESS AND GROWTH AS Macro Session 4
  2. 2. 08/04/2014 Loads of Revision Help on Twitter: @tutor2u_econ
  3. 3. 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
  4. 4. 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
  5. 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. 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. 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. 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. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. 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
  16. 16. 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
  17. 17. 08/04/2014 Loads of Revision Help on Twitter: @tutor2u_econ
  18. 18. Analysis Evaluation Application Good application opens the door to good analysis and good evaluation 7:49:36
  19. 19. 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?
  20. 20. 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
  21. 21. 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
  22. 22. 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
  23. 23. 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
  24. 24. 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
  25. 25. 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
  26. 26. 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
  27. 27. 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?
  28. 28. 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’.
  29. 29. 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
  30. 30. 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
  31. 31. 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
  32. 32. 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
  33. 33. 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.
  34. 34. 08/04/2014 Loads of Revision Help on Twitter: @tutor2u_econ

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