Summary New Keynesian economics

SUPPLY-
SIDEPOLI
CIES


Suppl
y-
sidepol
i
ciesar
egov
ernmentat
tempt
stoi
ncr
easepr
oduct
ivi
tyand
i
ncr
easeef
fi
ciencyi
ntheeconomy
.Ifsuccessf
ul,
theywi
l
lshi
ftaggr
egat
esuppl
y
(
AS)t
other
ightandenabl
ehi
ghereconomi
cgr
owt
hint
hel
ong-
run.Suppl
y-
side
pol
i
cies can hel
preducei
nfl
ati
onar
y pr
essur
eint
he l
ong t
erm because of
ef
fi
ciencyandpr
oduct
ivi
tygai
nsi
nthepr
oductandl
abourmar
ket
s.Theycan
al
sohel
pcr
eat
erealj
obsandsust
ainabl
egr
owt
hthr
ought
hei
rposi
ti
veef
fecton
l
abourpr
oduct
ivi
tyandcompet
it
iveness.I
ncr
easesi
ncompet
it
ivenesswi
l
lal
so
hel
pimpr
ovet
hebal
anceofpay
ment
s.


Theobj
ect
ivesofsuppl
y-
sidepol
i
cies:

Key concept
stof
ocus on ar
eincent
ives,ent
erpr
ise,t
echnol
ogy
,mobi
l
ity
,
f
lexi
bil
i
tyandef
fi
ciency
.

I
mpr
ovei
ncent
ivest
olookf
orwor
kandi
nvesti
npeopl
e’
sski
l
ls

 2.I
ncr
easel
abourandcapi
tal
product
ivi
ty

I
ncr
easeoccupat
ionalandgeogr
aphi
calmobi
l
ityofl
abourt
ohel
p
r
educet
her
ateofunempl
oyment

I
ncr
easei
nvest
mentandr
esear
chanddev
elopmentspendi
ng

 Pr
omot
ingmor
ecompet
it
ionandst
imul
ateaf
ast
erpaceofi
nvent
ion
andi
nnov
ati
ont
oimpr
ovecompet
it
iveness

 Pr
ovi
deapl
atf
ormf
orasust
ainedi
mpr
ovementi
nnon-
inf
lat
ionar
y
GDPgr
owt
h

 Encour
age t
he st
art
-up and expansi
on of new busi
nesses /
ent
erpr
isesespeci
all
ythosewi
thexpor
tpot
ent
ial
.

Macr
1| oEconomi
cs

,Ther
ear
etwomai
nty
pesofsuppl
y-
sidepol
i
cies.


1.Fr
ee-
mar
ket suppl
y-
side pol
i
cies i
nvol
ve pol
i
cies t
o i
ncr
ease
compet
it
ivenessand f
ree-
mar
ketef
fi
ciency
.Forexampl
e,pr
ivat
isat
ion,
der
egul
ati
on,
loweri
ncomet
axr
ates,
andr
educedpoweroft
radeuni
ons.
2.I
nter
vent
ioni
stsuppl
y-
side pol
i
ciesi
nvol
ve gov
ernmenti
nter
vent
ion t
o
ov
ercomemar
ketf
ail
ure.Forexampl
e,hi
ghergov
ernmentspendi
ngon
t
ranspor
t,educat
ionandcommuni
cat
ion.




getj
ob


1.Pr
ivat
isat
ion

Macr
2| oEconomi
cs

, Thi
sinv
olv
essel
l
ingst
ate-
ownedasset
stot
hepr
ivat
esect
or.I
tisar
gued
t
hatt
hepr
ivat
esect
ori
smor
eef
fi
ci
enti
nrunni
ngbusi
nessesbecauset
heyhav
e
apr
ofi
tmot
ivet
oreducecost
sanddev
elopbet
terser
vices.
2.Der
egul
ati
on
Thi
sinv
olv
esr
educi
ngbar
ri
erst
oent
ryt
oal
l
ownewf
ir
mst
oent
ert
hemar
ket
.
Thi
swi
l
lmaket
hemar
ketmor
ecompet
it
ive.Forexampl
e,BTusedt
obea
monopol
yint
elecommuni
cat
ions,butnow sev
eralf
ir
ms compet
eforour
busi
ness.Compet
it
ion t
ends t
olead t
olowerpr
ices and bet
terqual
i
tyof
goods/
ser
vice.


 Thedi
ff
icul
tyi
sthatnotal
lindust
ri
esar
eamenabl
etocompet
it
ion.For
exampl
e,powergener
ati
on and wat
ersuppl
yis a nat
uralmonopol
y.
Pr
ivat
izi
ngandder
egul
ati
ngt
hesei
ndust
ri
est
endst
o cr
eat
eapr
ivat
e
monopol
ywhocanchar
gehi
gherpr
ices.
3.Reduci
ngi
ncomet
axr
ates
I
tisar
guedt
hatl
oweri
ncomet
axr
atesi
ncr
easet
hei
ncent
ivesf
orpeopl
eto
wor
khar
der
,leadi
ngt
oani
ncr
easei
nlaboursuppl
yandmor
eout
put
.Si
mil
arl
y,a
cuti
n cor
por
ati
on t
ax gi
ves f
ir
ms mor
eret
ained pr
ofi
tthey can use f
or
i
nvest
ment
.


 Howev
ert
hisi
snotnecessar
il
ytr
ue,l
owert
axesdonotal
way
sincr
ease
wor
kincent
ives(
e.g.i
fincomeef
fectout
wei
ghssubst
it
uti
onef
fect
).Fi
rms
maynoti
nvestt
hei
ncr
easedpr
ofi
tbutgi
vet
oshar
ehol
der
sorsav
e.
4.Der
egul
ateLabourMar
ket
s
Labourmar
ket
scanbeder
egul
atedt
hroughpol
i
ciessuchas


 Makei
teasi
ert
ohi
reandf
ir
ewor
ker
s.Abol
i
shr
edundancypayorr
ightof
appeal

Macr
3| oEconomi
cs