Demand and Supply Side Policies - Coursework Example

Demand and Supple Side Policies Submitted by……………………….. Introduction It is can strongly advise on to endorsement of both the policies of supply side and demand side in improving the United Kingdom’s economic base. Economic growth implies an increase in the real Gross Domestic Product (GDP) of the country. Basically, policies that can be embraced to increase the growth of the economy constitute either a rise in the demand aggregate and supply chains. In this essay, I am going to discuss separately how the supply side policies and demand side policies can help to improve on the economy of the Britain. The demand side policies are of significance in the situations of economic regression and in periods of stagnation of the economy. Conversely, the supply side policies are key in the determination of the long term growth of the UK’s productivity. Discussion Demand side policies As is asserted by the literature of Keynes, the belief in his work was that whether the government distributed money to its consumers, the result would be demand for more commodities. This will result in creating incentive for the suppliers to provide more commodities. This implies that the major drive for economic growth is the demand (consumers). In relevance to this, for the optimal management of the economy of the United Kingdom, and for the economy to realize an increase in the GDP, the government should embrace the demand side policies. In addition, the government, should extensively and effectively focus on how to raise the expenditure of the average citizen. Demand side policies have the objective to cause a rise in the aggregate demand. If there exist negative production gap, the demand side policies are crucial in increasing the level of the economy. Conversely, if the economy of a country, in this case, the UK economy is at its full capacity in the rate of growth, inflation will be the consequence of a further rise in the aggregate demand (AD), as illustrated in the diagram 1 (Freeman, 2006, pg. 123). Diagram 1. Demand and supply interaction Among the aspects of the demand side policies which can control the economy is the monetary policy. The monetary policy is the basic instrument that can influence the activities of the economy. To increase the aggregate demand, the rate of interest can only be lowered by either the Central Bank or government (Langdana, 2009,p.27). A decrease in the rates of the interest lowers the cost of taking loans, increasing investment incentives, and expenditure by the consumers. Conversely, a decrease in the interest rates lowers the need to make savings, and instead creating attractiveness for spending. In addition, as a result of reduced interest rates, there will be a reduction in the payment of the mortgage interest, subsequently increasing the consumers’ disposable income. There is need to assess the monetary policies in helping to illustrate how the demand manages the economy. A reduction in the rates of interest cannot constantly increase the expenditure. In a liquidity trap, a reduction in the interest rates could make it impossible to increase the rate of expenditure because the citizens are making an attempt to repay the debts. Arestis (2011) narrates that in 2009, interest rates in the UK reduced to 0.5%, even though the expenditure rate became substantial (p. 56). Banks were not willing to give loans because of inadequate liquidity. As a result, hypothetically speaking, it becomes inexpensive to take loans, and even hard to actually generate credit. This illustrates that monetary policy cannot be effective in managing the growth of the UK economy. In regards to the fiscal policy, the UK government can increase the aggregate demand by lowering the tax rates, but with an increase in the government expenditure. A reduction in the tax laid on the income results into a rise in the disposable income. Such a situation encourages the expenditure by the citizens. Higher employment rate will be realized resulting into an economic growth. The problem with an expansionary fiscal policy is that it results into a rise on the loans taken by the government. To financially service the extra expenditure, the private sector will be the source of finance to the government. The implication is that an increasing rate of borrowing by the government can result into the overcrowding of the private entities. If the economy experiences a rapid decline in the private expenditure, the increase in the rate of savings, expansionary fiscal policy can be of importance in increasing the demand economy with no crowding out. The graph 1 illustrates an increase in the savings by the private sector, after the 2008 regression. This means that a rise in the level of savings results in a decline in the demand. Additionally, the other implication would be the bonds of the government would be in an increased demand. Thus, it can be said that the fiscal policies are effective in managing the economy by increasing the level of expenditure instead of increasing the rate of savings. Graph 1. UK savings ratio Supply side Policy The other way of managing the economy is by the use of the supply side policies; which focusses on increasing the level of production and proficiency of the economy. The supply side policies either constitute barring of the free market or overcoming the loopholes in the market condition. With this, the main objective of the government involves reduced inflation, reduced level of employment and increasing the suitable rate of the economic growth. Education, and training are examples of the supply side policies. If the named policies are incorporated, it facilitates a higher productivity of the labor market and increase in the productivity of the economy. Conversely, the supply side policy can be accounted for the failure of the government, like the government having poor data and establish schemes that are not appropriate and do not favor the employees (Michie, 1998,p. 33). Figure 1.1 illustrates the impact of the supply side policies in a classical method. Figure 1.1 supply side policies in a classical method. Supply side policies play an important role in the reduction of the rate of employment. For example, there is the argument that the causes of some cases of unemployment is as a result of the wages being more than the optimum level (equilibrium). The equilibrium level of the wages is also attributable to the trade unions and the set standards in the wages rates. If the government lowers the minimum wages, then there should be a reduction in the level of unemployment in a classical perception. However, this approach becomes ineffective of there is inelasticity in the demand for employees. The other cause for inelasticity is when the firms have monopsony influence. The other reason why there is need for the supply side policies is that the policies are key in helping other macroeconomic difficulties. If the policies of the supply sides are effective in the competitiveness of the UK’s economy, then an increase in the exports can be realized, and this can assist to balance off the deficits in the current account. However, it can take some time to have an impact and it could not end a quick rise in the imports, which overtime has been a major characteristic in the economy of the UK. If there is an increase in the production level and how the economy can be competitive in the global market, then the outcome would be a reduction in the inflation rate. This can be explained by the high inflation rate experienced in the UK during the 1970s (Arestis, 1997,p.79). The high inflation rate was as a result of the influential trade unions. Conclusion It becomes clear that if the two strategies are not embraced, then the UK government is at a risk of going down the way to experience a constrained demand, an economy with inexpensive labor. Such an economy is associated with the low wage rates, reduction in the productivity and eventually reducing the future standards of living. Not only is the economy of the UK in need of just a short lived incentive to increase the growth, but also extensive reforms in other sectors like education, and industrial policies. The transformations will be effective in managing the economic growth of the country. Bibliography Arestis, P., 1997. The relevance of Keynesian economic policies today. 5th ed. Houndmills, Basingstoke, Hampshire: Macmillan Press. Arestis, P., 2011. Microeconomics, macroeconomics and economic policy: essays in honour of Malcolm Sawyer. 4th ed. Houndmills, Basingstoke, Hampshire, UK: Palgrave Macmillian. Freeman, R., 2006. A Tale of Two Theories: Supply Side and Demand Side Economics, Chicago: Common Dreams. Langdana, F., 2009. Macroeconomic policy demystifying monetary and fiscal policy. NewYork: Springer. Michie, J., 1998. Employment, technology, and economic needs: theory, evidence, and public policy. 2nd ed. Cheltenham, UK: E. Elgar.. Read More