Supply Side Policies

 Supply-Side Policies refers to the economic policies designed to stimulate the economy by increasing production

Supply side policies seek to increase long run Aggregate Supply and so increase the productive potential of the economy 

➢increase the country’s AS and shift the LRAS to the right. 

• Combined with AD policies, they aim to meet government macroeconomics targets

Factors Affect Supply:

• Supply side policies aim to increase the quantity and quality of resources
•  Supply side policies can be private or public sector, e.g. improvements in productivity in the private sector. 
•  Focused on policies that increase production through less government and lower taxes

Policies Example :

Labor market measures ✓Improving education and training, reducing trade union powers, profit-related and performance related pay, encouraging more flexible pension arrangements 

Tax reforms ✓ reducing the tax burden and replacing direct with indirect tax

Welfare reform ✓Reducing state benefits to encourage

Industrial and competition policy ✓Privatization, deregulation, contracting out

Financial and capital market measures ✓Deregulating financial markets, greater competition amongst banks and building societies, encouraging saving and share ownership, promoting entrepreneurship

Example : Indonesia Government Supply Side Policies

➢ Improvement of human resource quality

 ✓ Most state-owned enterprises (SOEs) already conducted Human Resource Development (HRD) programs to improve the quality of their staff and employees.

 ✓ Industry 4.0 necessitates improvement in human resource quality

➢ Agrarian reform

 ✓ Adding value to the agricultural sector 

✓ Improved farm equipment has probably had the most significant impact on how farmers raise crops and care for livestock. Tractors, planters, and combines are much larger and efficient. These technologies and others have enabled farmers to produce more with less labor

Function Of Supply Side Policies

1. Improve incentives to look for work and invest in people’s skills 

2. Increase labor and capital productivity 

3. Increase occupational and geographical mobility of labor to help reduce the rate of unemployment 

4. Increase investment and R&D spending 

5. Promote competition and stimulate faster pace of innovation to improve competitiveness 

6. Provide a strong platform for sustained non-inflationary growth

7. Encourage the start-up and expansion of new business/enterprises especially those with export potential 

8. Improve the trend rate of growth of real GDP to help support improved living standards and regional economic balance