Explain how supply side measures can be used to promote economic growth (15)

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Katie Bhagaloo                Economics Unit 4

                Mrs Harker

Explain how supply side measures can be used to promote economic growth (15)

Supply side policies are government policies designed to increase the productive potential of the economy and push the LRAS curve to the right. They can affect the economy in a number of ways: increasing the supply of the quantity and quality of labour, raise the amount of capital employed, further the exploitation of natural resources and increase efficiency of the factors of production.

‘Fixing infrastructure’ was one of the factors David Cameron has mentioned that would provide immediate economic boosts and help with growth in the long term as well. To promote economic growth, supply side policies focus on shifting the LRAS curve to the right.

Supply side policies are an economic theory that states that a reduction in taxes will stimulate the economy through increased consumer spending. Over time, the increased economic growth will generate a larger tax base, which will recoup the revenue lost from the tax cut. Some argue that cutting taxes on activities such as saving and working would increase the productive potential of the economy. The level of taxes has an impact on investment and therefore LRAS. An increase in taxes on businesses will reduce the profitability of investment. With a lower rate of return, fewer investment projects will be carried out, limiting the productive potential and therefore growth in the economy.

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Higher tax rates will also affect investment coming from abroad as well as domestic investment. A country can raise inward levels of foreign investment by lowering business taxes. Free market economists argue that business taxes should be relatively low. This will in turn encourage investment and lead to higher economic growth. This is the case especially if a country can attract large amounts of foreign investment as a result of low taxes. However, on the other hand, it can be argued that for large economies, e.g. UK, business tax levels are only a small factor in business investment decision ...

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The essay has a good structure, posing a strong introduction by defining the key terms. Similarly, the conclusion is strong by weaving together all the points to come to a strong argument that supply side policies are important. The style is fine, and technical terms such as natural rate of employment are used with confidence. Spelling, punctuation and grammar are fine.

The analysis in this essay is sound, but there are places where improvements could be made. For example, the essay mentions "supply side policies focus on shifting the LRAS curve to the right" but at no point is a diagram included. Using diagrammatical analysis to show shifts and the effects will gain easy marks, as it shows a high level of skills. There is a lack in understanding shown when a diagram is not used, as a Keynesian curve would allow analysis of the different macroeconomic equilibria on the curve. A discussion of an increase in LRAS having an effect on inflation would've naturally led on if a diagram was used. I think the analysis is sometimes backwards, though in this essay. Saying "supply side policies may also affect labour productivity and unit labour costs." adds nothing to the argument. If I were doing this essay, I would be saying "A supply side policy is investment into education and training. This aims to increase labour productivity by providing the workforce with more skills". Being clear in economics is crucial, as it is so easy to swap the causes and suddenly the analysis makes no sense! If this essay wanted to go further, it could explore the limitations of supply side policies, but this isn't necessary given the task.

This essay engages well with the question, exploring supply side measures. As there is no command word such as "discuss" or "comment", there is no need to mention the effectiveness or significance. But, I would note that this question is commonly asked in exams but with a focus on effectiveness, so this essay would not be as strong in that context. Nevertheless, this essay is fine as it explains the mechanisms well, exploring a variety of supply side measures.