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Discuss how demand side policies and supply side policies may be used to increase short and long term economic growth.

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Introduction

´╗┐Mark Bonello Ghio Discuss how demand side policies and supply side policies may be used to increase short and long term economic growth. Demand side policies are policies that are made by the govt in order to stimulate any or all of the components of aggregate demand. This refers to the deliberate changes in govt expenditure and income so as to achieve desired economic objectives such as economic growth and the reduction of unemployment. Also, supply side policies are policies that the government imply as to increase the productivity of a country and shift the aggregate supply curve outwards. One way of increasing the component of consumption expenditure by the govt is by reducing direct and indirect taxation. When the govt reduces taxes such as income tax, it directly increases consumers? disposable income. The govt may also increase welfare benefits such as children?s allowance, unemployment benefits or pensions, which would have a similar affect. The reduction of indirect taxes, such as surcharges on utility bills or possibly other taxes linked to products/services of inelastic demand, could also have a positive effect. ...read more.

Middle

With better education and training also comes improved skills, flexibility and mobility. This is essentially used for the improvement of labour productivity. Therefore, with more investment in this comes more efficiency, which leads to more production. This all creates a multiplier effect. The real income of employees will improve, thus giving them more purchasing power. Research and development ? one way of increasing a company?s output is through research and development. A company must constantly be aware of the changes and improvements in technology in order to be up to date and to be able to produce its maximal output levels and methods of production. The way in which the govt may encourage this type of research is through the reduction on taxes. If the profits are made due to the research, then the govt will reduce the taxes on this profit made. This will push more companies into researching for better and faster equipment to be used, and hence the potential for the economy?s output. The main definition for this is a tax credit. When a company manages to increase the output, then the govt can grant patents and copyrights to their goods and services, thus further increasing the company?s abnormal profits and mark-up. ...read more.

Conclusion

With this, comes a lower labour cost and production cost, which then can lead to investment in other assets. Reduction in unemployment benefits ? the govt pays people a certain amount for not working. If this amount is reduced, then the unemployed will be seeking a new job as they will be better off if they actually worked. Even though the time lost cannot be made up for through the production that they are about to do now, it still contributes to the potential economic output, and also to economic growth. And finally, privatisation ? this means that the govt sells a publicly owned firm (owned by the govt) to a private company. The main goal for a private company is to create abnormal profits. Therefore, the factors of production in the new owners will be working much more efficiently and harder to be able to cut down on costs of production and also to produce more goods or services. Government owned firms have different goals to those of privately owned ones. These goals consist of decreasing the unemployment rate, or providing a service to an isolated market. (1,200 words) ...read more.

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