The Effects of Supply-Side Policies on Macroeconomic Aims (Cambridge (CIE) IGCSE Economics): Revision Note

Supply-side policies can help achieve macroeconomic aims

• Supply-side policy is action taken by the government to increase the economy’s productive potential by improving the efficiency and flexibility of markets

• These policies focus on increasing total (aggregate) supply in the long run, encouraging economic growth without creating inflationary pressure

Strengths of supply-side policies

• They increase the rate of growth of an economy

• They reduce inflation

• They often reduce unemployment 

• They often increase the value of net exports as an increase in total supply usually results in lower prices, leading to greater exports 

Weaknesses of supply-side policy

• The distribution of income worsens as labour market reforms and wage policies lower workers' wages

• They are expensive to implement

• There are significant time lags between government expenditure and seeing the benefits

  • E.g. education and training often take a long time to have a measurable positive impact

• Due to the long-term nature, changes in government often result in changes to budgets and scope of projects

• Vested interests can result in less effective outcomes

  • E.g. There are many examples of privatisation occurring in such a way that the government's preferred bidders obtained an asset at a knockdown price