The rate of economic growth measures the annual % increase in Real GDP. The long term trend rate of economic growth within the UK is concerning 2.five%. TO increase this the government can need to use offer side policies. But there may be instances when increased AD will also be ready to increase the speed of economic growth. If the economy is below full employment and there is spare capacity inside the economy. The govt can use demand facet policies to extend the rate of economic growth. For instance the government might use fiscal policy to extend the speed of AD. This could involve cutting taxes and increasing the amount of govtspending. AD= C+I+G+X-M. Thus higher Government spending can increase AD and lower taxes can increase disposable income thereby increasing Consumption and AD. Also the MPC might cut interest rates. This reduces the price of borrowing and reduces monthly mortgage payments.
So there can be an increase in the amount of borrowing, consumption and investment. But demand side policies do have some issues, firstly there will be time lags between changing taxes or interest rates and having an effect on AD. Additionally if shopper confidence is lower interest rates could not have a lot of result on increasing consumption. Additionally increasing AD will conflict with the government objective of low inflation. If the economy is close to full capability higher AD can cause inflation. Classical economists argues that higher AD will perpetually cause inflation, because the Long Run Combination Supply curve is inelastic. Within the classical model a rise in AD causes higher output in the short run, but as inflation increases, wages and so the prices of firms increase inflicting the SRAS to shift to the left. Thus the economy returns to the extent of Full employment however with higher inflation.
Thus classical economists argue that demand should not be used to extend the speed of economic growth. However this classical model isn't necessarily correct. Keynesians argue that an economy can be in a very recession for a protracted time. This is often as a result of of low client confidence reducing spending and also the negative multiplier impact reducing additional the initial fall in AD. Thus in an exceedingly recession Keynesians would argue that it's necessary to extend AD whether or not a re-flationary fiscal policy causes a budget deficit. Nevertheless each Keynesian and classical economists argue that to increase the long run trend rate of economic growth it is necessary to extend productivity and shift the LRAS to the proper this may be done through provide facet policies. As an example the government will increase the motivation to figure by cutting taxes and reducing benefits. But there is no guarantee that lower taxes do increase work incentives.
The Income impact means people can work less to earn the same quantity of money. Additionally inequality might increase. The government can overcome market failure by increasing spending on education and training, this will increase labour productivity and so efficiency within the economy. However this policy can take time to own effect. Additionally governmentintervention might not be terribly successful because of poor info resulting in subsidising of the incorrect types of training. A third kind of supply side policy may be to follow a programme of privatisation and deregulation. Privatisation involves selling governmentowned industries to the personal sector.
The advantage of this can be that the private sector encompasses a profit incentive to extend efficiency. But there are dangers that a personal monopoly might exploit consumers. The instance of rail privatisation additionally showed that privatisation might not achieve success, non-public firms underneath invested in the network as a result of they took the short term view. Deregulation involves increasing competition in an business this has obvious benefits of lower prices and higher quality however is troublesome to attain in industries like rail and water. Offer side policies could facilitate improve productivity in the long run, there is proof that since the govt many offer facet policies introduced within the 1980s the economy has performed better with inflation remaining low despite growth being strong. But there's a limit to how much the govt. can increase productivity many problems are beyond their control, for example it is tough for the govt. to enhance technology and working ethics. Conjointly the speed of economic growth is seemingly to be effected by international events over which the UK govt. has no control.
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Dorish Hill Grant has been writing articles online for nearly 2 years now. Not only does this author specialize in Economics, you can also check out his latest website about:
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