Policies to Promote Economic Growth · Revision Notes · Economics

Demand-side policies

Demand-side policies aim to influence the total demand in an economy
The two demand-side policies are fiscal policy and monetary policy
Any policy that increases consumption, investment, government spending or net exports is likely to promote economic growth (cause an increase in real GDP)

Examples of fiscal policy used to promote growth

Taxes on many imports (import tariffs) are eliminated
- Costs of production for firms are reduced and they can produce more goods and services at lower prices - which will increase total demand
Subsidies are provided to manufacturers of electric cars
- Car manufacturers are able to produce their cars more cheaply and sell them at lower prices - which will increase total demand
A government increases the level of unemployment benefits
- Unemployed workers have more income available and increase their consumption – which will increase total demand
A government creates a free port zone
- Both multi-national and domestic companies are incentivised by the low- or no-tax promise and seek to invest in free port zones which will increase total demand
A government announces that it will build 14 new schools in the next financial year
- Building companies have to be employed and building materials consumed, which is all paid for by the government and will increase total demand

Examples of monetary policy used to promote growth

The housing market is subdued and so the Central Bank lowers interest rates by 1%
- With cheaper loans now available, house buyers demand more loans to purchase properties and to renovate and furnish properties - consumption increases and total demand increases
The Central Bank intervenes in the exchange rate to depreciate it
- The nation's currency is now cheaper for foreigners to purchase and this boosts exports, which will increase total demand
The Central Bank commits to a new quantitative easing programme of $75bn a month
- Commercial banks, firms and private investors receive this money as the government purchases their bonds
- They use some of it to invest and consume resulting in greater total demand

The effectiveness of demand-side policies

Demand-side policies are most effective when there are unused workers and factories
They are less effective when the economy is already working at full capacity

Advantages	Disadvantages
Faster impact – can increase total (aggregate) demand quickly, especially when there is spare capacity in the economy Reduces unemployment – higher demand leads to more output and more jobs Targeted spending – government can direct spending or tax changes towards sectors that need support Helps in a downturn – supports economic growth when private sector spending is weak Boosts confidence – clear policy action can encourage consumers and firms to spend and invest	Inflation risk – if the economy is close to full capacity, extra demand may mainly increase prices rather than output Budget deficits – higher government spending or tax cuts can reduce government revenue and increase national debt Crowding out – if the government borrows heavily, it may push up interest rates and reduce private sector investment Short-term focus – does not deal with long-term supply-side issues such as low productivity or skills shortages Worsening balance of payments – if demand rises, imports may increase faster than exports Time lags – fiscal policy changes can take time to implement and monetary policy changes take time to influence total demand

Advantages

Disadvantages

Faster impact – can increase total (aggregate) demand quickly, especially when there is spare capacity in the economy
Reduces unemployment – higher demand leads to more output and more jobs
Targeted spending – government can direct spending or tax changes towards sectors that need support
Helps in a downturn – supports economic growth when private sector spending is weak
Boosts confidence – clear policy action can encourage consumers and firms to spend and invest

Inflation risk – if the economy is close to full capacity, extra demand may mainly increase prices rather than output
Budget deficits – higher government spending or tax cuts can reduce government revenue and increase national debt
Crowding out – if the government borrows heavily, it may push up interest rates and reduce private sector investment
Short-term focus – does not deal with long-term supply-side issues such as low productivity or skills shortages
Worsening balance of payments – if demand rises, imports may increase faster than exports
Time lags – fiscal policy changes can take time to implement and monetary policy changes take time to influence total demand

Supply-side policies

Supply-side policies aim to influence the total supply in an economy

Examples of supply-side policies to promote growth

The government reduces the level of welfare benefits
- People who rely on benefits for survival are more likely to make themselves available for work
- With more workers in the economy there can be a higher level of output and economic growth
The government launches a new 'Education and Training' fund to help fund university students studying artificial intelligence (AI)
- This provides a pool of skilled labour in AI and helps to grow a new industry, resulting in greater national output and economic growth
The government decides to remove quotas on all imports
- The removal of this protection lowers prices and encourages more competition, leading to higher output and economic growth
The government decides to build an additional runway at the national airport
- An additional runway means that more planes can land, which generates more economic activity (e.g., transport of goods) leading to higher output and economic growth

The effectiveness of supply-side policies

Supply-side policies are better for solving long-term growth and unemployment problems
They are less effective at quickly boosting growth during a recession because they take time to work

Advantages	Disadvantages
Lower inflation risk – can increase productive capacity without pushing up prices if total demand stays stable Reduces unemployment – in the long run, by making the labour market more efficient and increasing skills Encourages investment – better infrastructure, education and training can attract business investment Improves competitiveness – lowers production costs and increases efficiency, helping exports Long-lasting benefits – improves the quality and quantity of factors of production Supports trade balance – more competitive products can increase exports	Slow to work – benefits may only appear years after implementation High cost – can be expensive for the government, increasing the need for taxes or borrowing Possible inequality – reducing welfare benefits can harm low-income households Uncertain results – policies may fail to boost productivity if not well targeted Short-term disruption – deregulation or removing import quotas can cause job losses in some industries Political resistance – reforms may be unpopular with voters or interest groups

Advantages

Disadvantages

Lower inflation risk – can increase productive capacity without pushing up prices if total demand stays stable
Reduces unemployment – in the long run, by making the labour market more efficient and increasing skills
Encourages investment – better infrastructure, education and training can attract business investment
Improves competitiveness – lowers production costs and increases efficiency, helping exports
Long-lasting benefits – improves the quality and quantity of factors of production
Supports trade balance – more competitive products can increase exports

Slow to work – benefits may only appear years after implementation
High cost – can be expensive for the government, increasing the need for taxes or borrowing
Possible inequality – reducing welfare benefits can harm low-income households
Uncertain results – policies may fail to boost productivity if not well targeted
Short-term disruption – deregulation or removing import quotas can cause job losses in some industries
Political resistance – reforms may be unpopular with voters or interest groups

Demand-side policies

Demand-side policies

Examples of fiscal policy used to promote growth

Examples of monetary policy used to promote growth

The effectiveness of demand-side policies

The effectiveness of demand-side policies

Supply-side policies

Supply-side policies

Examples of supply-side policies to promote growth

The effectiveness of supply-side policies

The effectiveness of supply-side policies

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