Definition
- Supply-side policy
- Supply-side policy is government action to raise potential GDP by increasing the quantity or productivity of the economy's labour, capital and technology.
- Not to be confused with: Demand-side policy
- Demand-side policy is fiscal or monetary policy used to shift aggregate demand so that output moves towards potential GDP.
Example
Can you think of one market-based and one interventionist measure a Budget might contain?
A Budget contains three measures. Cutting corporation tax from 25 to 23 per cent is market-based: firms keep more profit and decide themselves what to invest in. Spending £2 billion on a new rail line and £500 million on adult skills courses is interventionist: the state chooses the project and pays for it. All three aim to shift long-run aggregate supply to the right.
Test yourself
What is the difference between supply-side policy and demand-side policy?
Supply-side policy adds to productive capacity; demand-side policy changes how much of existing capacity is used.