Revision of Economics: Macroeconomics

Topic 1: Measuring economic activities

Measurement by National Income

 A very simple relationship exists between firms and households which forms much of the basis of economic thoughts today and drives national income.
o This is referring to the circular flow of income model – showing how factors of production, goods, and income flow between households, firms, government,
the financial sector, and the foreign sector.
o The interdependence between households and firms suggests that if one stops spending, the other will stop as well. Contrastingly, if one were to just
increase/decrease their spending, then the other would also react similarly.
 When we look at a bigger picture, we can see that it is not only consumers that spend money in an economy.
o The government also spends their revenue on schools, roads, and infrastructure.
o The financial industry spends money to lend to businesses so that they can invest capital and expand.
o Other countries also spend money to buy goods/services/resources from one another.

 These injections and leakages in the circular model are tracked and compiled as national income data. They are more commonly referred to as gross domestic
product (GDP).
o Definition of GDP: the total monetary value of all final goods and services produced within an economy (of a country) in a specific amount of time, usually a
year.
 GDPs are generally measured in a specific time period, most commonly a year (annually).
 In our increasingly globalized world, we must consider the effect of the ownership of resources on national income, as there exists multinational corporations,
income of which would be distributed in different countries where they are located.
 When we factor in net income earned from abroad, GDP becomes gross national product (GNP) or gross national income (GNI).

Advantages and Disadvantages of Using the Method

 ADVANTAGES DISADVANTAGES
Allows for comparisons across countries Overestimates the Quality of Life
Having an internationally agreed method of measuring GDP allows The calculation of GDP accounts for all economic activity that takes place in a
governments to compare the relative strength of their own economy with country. This includes activity that should have been internalised previously or
others. merely restores what has been destroyed. There have been various attempts in
recent history to correct GDP statistics for negative economic output in order to
restore this issue.
Informs policy maker Does not account for disparity in income distribution
Achieving economic growth is one of the primary objectives of government. GDP cannot tell us about income distribution in a country. The lack of social
mobility is a problem that most countries experience, with large concentrations
of wealth distributed among only a very small proportion of the population and
transferred from generation to generation. Equally, those who are financially
less wealthy can get stuck in a poverty trap.
Gives an indication of average income Inaccuracies remained
When GDP is divided by the population size, we get the average national It is very difficult to gather the large volumes of data necessary to accurately
income or GDP per capita. This should be able to tell us the likely income earned calculate GDP. Depending on the efficiency and resources of the agency in
by a citizen of the country. However, it is just an average, and in the case of charge of gathering data in a country, how can we guarantee that the
some nations it may not provide us with a fully accurate result. information published by agencies is always accurate?
Unaccounting for improvements in quality of output
Companies are constantly trying to improve their products or services, but
prices often remain relatively unchanged or sometimes even fall over time as
productivity improves.

'The gross national product ... measures everything ... except that which makes life worthwhile.'
- John F. Kennedy

Methods to measure national income/nominal GDP

THE OUTPUT METHOD THE INCOME METHOD THE EXPENDITURE METHOD

 Firms are surveyed for their output per given  Adding up the income earned by groups when  Adding up the total sales receipts for goods and
time period. the factors of production are sold in the resource services sold in the economy.
 Each value belongs to one stage of production. market.  This is considering consumptions, government
 Disadvantage: Impossible to measure the  Owners of the FOPs are paid wages, rents, spendings, investments, and net exports.
informal economic activities interests, and profits.
 Advantage: Give a self-report for each sector  Disadvantage: Inability to measure the informal GDP = C + I + G + X − M
economic activities.
 No matter which method is used, they should result in the same answer.
Distinguishing between Nominal GDP and Real GDP
 Real GDP is when the calculation considers the effects of inflation. Nominal GDP doesn’t.

Nominal GDP
Real GDP = × 100
Price Deflator

Total GDP
GDP per capita =
Population

GNI = GDP + Net property income from aboard

The Business Cycle

 We tend to see fluctuations in economic output activity over time. They can be illustrated in a diagram known as the business cycle (a.k.a., the economic or trade
cycle)
 This can be broken down into 4 phases:
o [1] expansionary phase
o [2] peak phase
o [3] contractionary phase
o [4] trough phase

Alternative measures of well-being

WORLD HAPPINESS REPORT OECD BETTER LIFE INDEX

 In 2011, the UN General Assembly passed a resolution to include an indicator  Measures the following variables:
of people’s happiness in the measures of economic development. o housing
 The citizens get to judge their overall happiness on a scale of 10 (using a tool o income
called the Cantril Ladder) o jobs
o community
o education
o environment
o civic engagement
o health
o life satisfaction
o safety
o work-life balance
 Sources: OECD, National Accounts, United Nations Statistics, etc.
GROSS NATIONAL HAPPINESS HAPPY PLANET INDEX
 Develeoped in the 70s, in Bhutan.  Four indicators:
o Well-being
o Life expectancy
 o Inequality of outcomes
o Ecological footprints

well being × life expectancy × inequality of outcomes

HPI =
ecological footprints

GREEN GDP
 When we pay someone to clean up the streets and pick up rubbish, that person earns an income. This income is included in the estimates for GDP. The more
people we pay, the higher the GDP.

Topic 2: Aggregate Demand and Aggregate Supply

Aggregate Demand
 This refers to the total demand for goods and services produced in an economy and consists of consumption expenditure, government expenditure, investment
spending, and net exports.
 The line representing the aggregate demand also has a negative slope. This is because of:
o the wealth effect – PL↓ = Wealth↑ (purchase power increases)
o the interest rate effect – Low PL = Low interest rates = Less incentives to save
o the net balance effect – Low PL = More to buy

Determinants

CONSUMPTIONS INVESTMENTS NET EXPORTS

 Confidence  Interest rates  Incoming of trading partners
o High confidence = Rightward o Low interest rates = Increase investments o High income = More consumption =
 Unemployment  Business confidence Increase AD
 Real interest rates o More confidence = Increase investments  Exchange rates
o Higher rates = Less consumption  Technology o Appreciated ER = Lower AD
 Wealth  Business taxes  Trade policies
o Wealth increases = Rightward  Level of corporate indebtedness
 Personal taxes
o High tax = Less consumption
 Level of household indebtedness
o Short-run = Rightward
o Long-run = Leftward
 Expectations of price level

Aggregate Supply
 This refers to the total output that all firms in a country are able to produce at any given price level.
 We consider aggregate supply in terms of the short run and the long run.
o Short run is referring the supply when the resource prices for most firms are constant

Determinants of Short Run Aggregate Supply

RESOURCE PRICES GOVERNMENT INTERVENTION SUPPLY SHOCKS

Just like you learned in microeconomics, the price of Two types of possible interventions:  Refers to what happens to the overall aggregate
inputs relating to production can have a significant  Regulation supply in a country when it is affected by a
impact on a firm's productive capacity and ability.  Changes in business taxes shocking event.
 Subsidies

Different Views of Long Run Aggregate Supply

THE NEW CLASSICAL/MONETARIST SCHOOL THE KEYNESIAN SCHOOL

 Believes in the power of the market.  Proposed by British economist Keynes.
 If prices are allowed to be fully flexible, markets can correct any shortages or  Counter the monetarist school ideology.
surpluses.  His reasoning was that resource prices exhibit downward inflexibility.
 If resource prices are allowed to rise and fall according to market behaviour,  When there is space capacity in the economy and firms are trying to cut
then all resources can be fully employed in the long run, maximizing the costs, Keynes argued that it is not possible to reduce wages in order to do so,
nation’s output. The economy will always return to the full employment level as a result of labour contracts, trade unions, etc. Rather than adjusting price,
of output (or potential GDP) as the price level has no effect on the he argues that economy can work below full employment.
full potential of output. Therefore, we can draw a perfectly inelastic long-run
aggregate supply (LRAS) curve.

 The horizontal section – spare capacity in the economy

  The upward sloping section – beginning to see some competition for scarce
resource
 The vertical – full employment
 Unless wages fall, firms have no choice but to make workers redundant
during a recession. This is because they sell fewer goods, as aggregate
demand is low, and so look for ways to keep profits from falling.

Relation of the LRAS and the factors of production

 LRAS represents the potential capacity of an economy’s factors of production.
 Any changes in the quantity or quality of the factors of production can cause a shift in the LRAS curve.

LAND LABOUR CAPITAL

 This refers to the natural resources and inputs  This refers to the people that make up the labour  This refers to the tools and machinery that are
that a country has available. force the country. used in production.
 More land = LRAS shifts rightward  More labour = LRAS shifts rightward  More capital = LRAS shifts rightward

Short-run Macroeconomic Equilibrium

 Changes in AD:
o When the AD shifts leftward, economy is producing below its full employment level, which is called a recessionary gap.
o When the AD shifts rightward, economy is producing more than the potential, which is called an inflationary gap.
 Changes in SRAS:
o SRAS shifts leftward when there is a supply shock or increase in resource prices, which is called a stagflation.
o SRAS shifts rightward when there is a fall in price level.
 Shifts in AD can help explain where we are at in the business cycle.
Long-run Macroeconomic Equilibrium

New-Classical/Monetarist Model
 From this model, as prices are fully flexible, this economy will always tend towards full employment.
o A fall in aggregate demand can lead to firms to reduce costs (e.g., reducing wages, cutting down employees, etc.) to go back to Yfe.
o A rise in aggregate demand can lead to firms to increase wages to cope with inflation to return to Yfe.
 Economists who subscribe to this school of thought will want the government to invest in education and infrastructure to boost the productive potential of the
economy and shift long-run aggregate supply outwards.
 Another important point that the classical economists made is that the full employment level of output Y fe corresponds to the natural rate of unemployment, as at
the long-run equilibrium only the natural rate of unemployment exists.

Keynesian Model
 The main counterpoint of Keynes: economy may adjust in time, but that in the short run, government action might be needed.
 Price inflexibility downwards: prices did not always correct downwards because of employment contracts, minimum wage laws and trade unions.
 The point of disagreement arises from the assumption that resource prices will fall in a deflationary environment. Keynes advocated increased government
spending to help correct the economy. Earlier, we discussed how Keynes believed that prices did not always correct downwards because of employment
contracts, minimum wage laws and trade unions. He argued that economies could get 'stuck' in a short-run position and would not return to the full
employment level of output.
 According to Keynes, the economy can achieve equilibrium below the full employment level of output and stay in that position until the government
intervenes, which is referred to as a deflationary gap or recessionary gap as both the price level and the real GDP (rGDP) are decreasing with the leftward shift of
AD. In the figure below, this would correspond to aggregate demand being at AD1, with a real output of Y 1 and the price level at P1, in a position with lower rGDP
and PL than AD3 at full employment. Keynes believed that economies could get stuck at Y1 unless otherwise assisted by government spending. It is only when
aggregate demand increases to AD2 that upward pressure starts to build on the price level.
 So, according to the Keynesian economic school of thought, the economy can get stuck at Y1, below the full employment level of income, which is also
considered equal to the natural unemployment rate by the economists. As a result, the rate of unemployment will be much higher than the natural rate of
unemployment. As resources become more fully employed, it is only by raising prices that resources can be redistributed from one use to another. In the labour
market, a shortage of workers means that firms will have to compete with each other for existing workers by offering higher wages. Paying higher wages means
that firms will have to raise the selling price of goods and services, so the average price level rises throughout the entire economy.
Assumptions and Implications of Each Model

ASSUMPTIONS NEW-CLASSICAL/MONETARIST KEYNESIAN

Some markets can exist in disequilibrium for longer
Market Disequilibrium is corrected by market force
periods

Should not be allowed to persist as long-term

Unemployment A sign that the labour market is in disequilibrium
unemployment reduces economic potential

Trade unions and minimum wages will reduce the

Wages Wages are downward inflexible or ‘sticky’
ability of labour market to establish equilibrium
Should support markets to be able to return to
Government must intervene with government spending
Role of Government equilibrium. Labour market policies to improve
during a recession, even if the government must borrow
competitiveness

View of Borrowing Government borrowing crowds out private investment No crowding out during recessions

The Reality of Price and Wage Flexibility

 The extent to which prices change will depend on the type of goods in question, the severity and length of the economic contraction, and the regulations in place
to prevent the price fluctuations.
 Free-market economists would argue that the government should interfere as little as possible to allow prices to correct themselves and for resource allocation to
be optimised. This means that economies would also be able to self-correct after a contraction, although not everyone agrees.

The Government’s Role in the Economy

 Monetarist ideology – less government intervention in markets when it comes to prices and resource allocation.
o Although there are some important conditions concerning externalitities and worker safety, they believe that prices allow markets to self-correct in times of
recession.
o The role of government – reduce restrictions + engage in supply-side policies (increasing aggregate supply, expanding business investment, production and
growth, and lowering unemployment via increasing the quantity and quality of the factors of production).
 Keynesian ideology – governments should focus on the present more
o Governments should intervene when economic activities are low
o Governments should use fiscal and monetary policies.
 Views on government budgets and deficits:
o Keynesians see recessions as times when governments should borrow and spend to boost the economy, and because borrowing would be less likely
to crowd out private investment.
o Monetarists believe that government borrowing crowds out private investors from the market. As governments engage in deficit spending, that money may
be raised by selling bonds to domestic investors. Therefore, those investors do not save their money in banks and other institutions, reducing the supply and
raising the price of those funds.
Topic 3: Macroeconomics Objectives

Short and Long-term Economic Growth

SHORT-TERM ECONOMIC GROWTH LONG-TERM ECONOMIC GROWTH

 Also known as increase in actual output.  Also known as increase in potential output.
 Represented by increase in the AD.  Represented by population growth, discovery of new resources, and
improvements in education and technology (which are the determinants of
LRAS).

Calculation of economic growth

rGDP − rGDP
Rate of economic growth = × 100
rGDP

Consequences of economic growth

 Living standards:
o In general, the living standards are better (more disposable income and goods)
 Environment:
o Generally, it is a sacrifice between one another. Although, more developed countries have found ways to protect their environment more.
 Income distribution:
o Case-by-case difference.

Unemployment
 What does it mean to be unemployed?
o Has to be actively seeking jobs in the workforce (meaning, of age 18 to 65)
 Calculations of unemployment rate:
Number of Unemployed
Unemployment Rate = × 100
Total Labour Force
Difficulties in Measuring Unemployment
 Hidden unemployment – this counts part-time workers (not fully using all their utilities, but are considered as “employed”), people who works dual jobs, people in
retraining programs post job-loss, and early retirees (who are believed to be working, but are not).
 Discouraged workers – people may be put off looking for work if they have spent a long period of time unemployed (which they are not counted as they are not
actively seeking for work)
 Regional, ethic, age, and gender disparities - Because the unemployment rate is usually published as a national unemployment rate, and is essentially an average,
the data ignores regional, ethnic, age and gender disparities.
 Informal economy – black market workers = unemployed

Types of Unemployment

DISEQUILIBRIUM UNEMPLOYMENT NATURAL RATE OF UNEMPLOYMENT

 Occurs when there is a fall in demand for labour in the economy, but sticky  This is irrespective of the level of GDP of the economy or its position in the
wages prevent the market from reaching equilibrium. business cycle.
 Cyclical Unemployment  Frictional unemployment = people in between jobs
o Also known as demand-deficient unemployment  Seasonal unemployment = only required certain parts of the year
o When a decrease in demand forcing firms to make employees redundant.  Structural unemployment = mismatch in supply and demand of a particular
o Solution: fiscal and monetary policies (demand-side policies) set of labour skills
o Possible reasons: relocation of industry + difficulties in changing job
types.
o Solution: flexibility improvements

 Real-wage Unemployment
o There is a gap between the number of jobs available and the number of
people willing and able to work at the prevailing wage rate.
Costs of Unemployment

ECONOMIC PERSONAL SOCIAL

 Loss of GDP  Increased indebtedness, homelessness, and family  Increased crime rates
 Loss of tax revenue breakdown.  Increased risks to health
 Increased costs of unemployment benefits  Increased stress level.
 Loss of income for individuals (not always)
 Greater disparities in distribution of incomes

Inflation
 Definition of inflation: a sustained increase in the general price level over a period of time.
o When money loses its value, we see prices rise as a result.
o If the rate of inflation surpass 50%/month  hyperinflation.
 Macroeconomic objective: low rate of inflation
o To new classical economists, this is the most important objective as unstable rates of inflation cause uncertainty in the economy and affect consumers' and
firms' spending decisions.

Measuring Inflation
 A difficult task.
 Most countries aim to measure inflation every month.
 Measurement: consumer price index (CPI)
o Procedures
 First, select a list of typical goods and services that are bought in the economy by the typical family of two adults + two children.
 Second, price measures at different outlets to get an average price change.
o Limitations
 Selection of goods of what are bought of a typical household
 Differences in income distribution
 Changes in consumption patterns
 Changes in quality over time

Types of Inflation
 Demand-pull Inflation
 o Increase in aggregate demand in the economy
 Cost-push inflation
o Decrease in aggregate supply, due to increase in the costs of production or a sharp disruption in the availability of the factors of production.

Costs of High Inflation Rate

 Greater uncertainty
 Redistributive effects – low-income are worsened off
 Saving is less effective when inflation > interest rates.
 Damage to export competitveness
 Inefficient resource allocation
 Impact on economic growth

Deflation and Disinflation

 Deflation = decrease of price over time.
o Positive deflation – improved productivity
o Negative deflation – persistent decline in economic activity
 Disinflation = decrease in inflation rates
 Costs of deflation
o Business uncertainty
o Redistributive effects
o Deferred consumptions
o Cyclical unemployment
o Bankruptcies
o Increase in the real value of debt
o Inefficient resource allocation
o Policy ineffectiveness

Topic 4: Economics Inequality and Poverty

The Relationship Between Equality and Equity

 Equality refers to the situation where economic outcomes are the same/similar for different people or social groups.
 Equity refers to the concept of fairness or evenness and is considered an economic objective.
 Usually, equality in economics is the complete opposite of equity.

The Meaning of Economic Inequality

 Generally, economic inequality refers to two things:
o First, unequal distribution of income.
o Second, unequal distribution of wealth.

UNEQUAL DISTRIBUTION OF INCOME UNEQUAL DISTRIBUTION OF WEALTH

 Although we do not think that we should all earn equal incomes, we do tend  The issue of unequal incomes within societies has been a focus for some
 to agree that incomes should be distributed fairly; that is, there shouldn't be a time, but so has the amassing of wealth among individuals, both within a
few people earning a lot while too many people earn too little. person's lifetime and with wealth passed on from generation to generation.

Tools to Measure Inequality

LORENZ CURVE GINI COEFFICIENTS

 Plots the cumulative shares of the population in either deciles or quintiles on  Calculatable from the Lorenz curve.
the x-axis against the cumulative shares of income earned by those groups on  Higher Gini coefficient, more unequal.
the y-axis. A
Gini coefficient =
 There is a 45° line to represent perfect equality. A+B

Poverty

Absolute and Relative Poverty

 Absolute poverty refers to the internationally defined levels of poverty.
o According to the United Nations in 1995, absolute poverty is a condition characterised by severe deprivation of basic human needs, including food, safe
drinking water, sanitation facilities, health, shelter, education, and information. It depends not only on income but also on access to services.
 Relative poverty refers to a low level of income that is country-specific and relative to the average earnings in that country.

Measuring Poverty
 Single indicators
o The international poverty line – a monetary threshold under which an individual is considered to be living in poverty.
o High birth rates and dependency ratios also indicates emerging economies and are potential drives of poverty.
o Dependence on the primary sector.
o Large informal economies.
o Minimum income standards.
 Composite indicators
o Human Development Index – includes GDP per capita, life expectancy, and years of schooling.
 o Multidimensional Poverty Index (by the UN).

Difficulties
 Data imperfection as survey results are affected by sampling and weighting.
 Intra-household poverty – ignoring individual level of poverty.
 Urban poverty ≠ rural poverty.
 Disaggregated poverty data – data not produced at a global, or even country level.

Causes of Economic Inequality and Poverty

 Inequality of Opportunity - when people living in the same society do not have access to the same opportunities
 Different Levels of Resource Ownership - Some people inherit wealth in the form of bonds and stocks or land, which gives them an income advantage and
something to fall back on in times of unemployment.
 Different Levels of Human Capital
o A lack of human capital refers to the lack of education or skills necessary to get good jobs or progress in a career.
 Discrimination - the prejudicial act of treating a person or social group unfairly because of who they are or the characteristics they have.
 Unequal Status and Power
 Government Tax and Benefits
 Globalization and Technological Changes

Role of Taxation in Reducing Inequality and Poverty

Different Systems of Income Taxations

 Progressive Taxation – people being taxed higher rates of tax the more they earn.
 Regressive Taxation - where the percentage paid in tax rises the less a person earns.
 Proportional Taxation - when everybody pays exactly the same percentage of tax.

Types of Direct Taxes

 Personal income tax – paid by individuals and sole traders in most countries.
 Corporate income tax – tax imposed on the income or capital of corporations or companies.
 Wealth tax – tax on an entity's holdings of assets, such as personal assets like cash, bank deposits and real estate

Indirect Taxes
 Indirect taxes are taxes which are not charged directly on people's incomes or wealth. They are paid indirectly by consumers when they purchase a good, as
indirect taxes are included in the price of the good.

Policies to Reduce Poverty and Inequality

 Inequality of Opportunity and Human Capital
o Ensuring that all individuals have fair access to the opportunities available to increase their potential to gain human capital (like uni access, healthcare, etc.)
 Transfer Payments
o Transfers of money usually from the government to low-income households, but not in exchange for a good or service.
 E.g., old-age pensions, unemployment benefits, and child allowances.
 Targeted Spending on Goods and Services
 Universal Basic Incomes
o Transfer payment that aims to raise lower levels of income by providing a universal payment to every citizen.
 Policies to Reduce Discrimination
 Minimum Wages

Topic 5: Demand-Management Policies

MONETARY POLICY FISCAL POLICY

 Policies where the central banks use the money supply and interest rates to  Policies where the government intervenes in the market and uses
 manage the economy. government expenditures and/or taxes to manage the economy.
o The central bank is an independent authority which is responsible for the  Types of government expenditures:
monetary system in a nation. o Current expenditure – keep the government structures intact
 Goals o Capital expenditure – infrastructure and buildings
o Lower and stable inflation o Transfer payment
o Low unemployment  Goals
o Reducing fluctuations in business cycle o Lower and stable inflation
o Stable economic environment for long-term growth o Low unemployment
o External balance o Reducing fluctuations in business cycle
 Expansionary vs Contractionary o Stable economic environment for long-term growth
o Expansionary o Equal distribution of income
 Increase money supply + Decrease interest rates o External balance
 Increased investments  Expansionary vs Contractionary
 Done during recession o Expansionary
o Contractionary  Increase government spending + Decrease taxation
 Decrease money supply + Increase interest rates  Increased consumption + government spending
 Decreased investments = More saving  Increased AD
 Done during inflation  Done in recession
 Difficulties o Contractionary
o Low consumer and business confidence  Decrease government spending + Increase taxation
 Strengths  Decreased consumption + government spending
o Easily reversible  Decreased AD
o Short time lags  Done in inflation
 Difficulties
SIDE NOTES: Roles of a central bank o Political pressure
 Print money and mint coins o Longer time lags
 Determine the money supply and interest rates o Sustainable debts
 Lender of last resort for commercial banks  Strengths
 Issue bonds and other financial instruments, lending money to the o Target specific sectors
government. o Government spending more effective in recession
 Regulate the banking system o Can also affect the supply-side (government expenditure where?)

SIDE NOTES: Nominal vs Real Interest Rates

 Nominal Interest Rate – shown by the commercial bank

Nominal ≈ Real + Interest Rates

Topic 6: Supply-Side Policies

 Supply-side policies are designed to encourage market forces and increase competition.
Goals
 Long-term growth by increasing the economy’s productive capacity
 Improving competition and efficiency
 Reducing labour costs and unemployment through labour market flexibility
 Reducing inflation to improve international competitiveness
 Increasing firms’ incentives to invest in innovation by reducing costs.

Types of Supply-Side Policies

MARKET-BASED INCENTIVES-RELATED INTERVENTIONIST

 Sub-type #1 – Engage competition  Personal income tax cuts  Involving the government directly intervening in
o Deregulation – reducing rules and o More possible disposable income  More the economy to increase the quantity or quality
restrictions in sales of goods and services efficiency of the factors of production.
o Privatization of more firms.  Reduced  Cuts to business and capital gains tax  Few examples:
costs, increased efficiency, and increased o Less cost  More efficiency o education or other forms of training
profits. o improving quality, quantity, and access to
o Trade liberalization – decreasing trade health care
barriers o research and development
o Anti-monopoly regulation o provision of infrastructure
 Sub-type #2 – Labour markets o industrial policies
o Reducing power of labour unions
o Reducing unemployment benefits
o Abolishing minimum wages

Effects on Demand
Some supply-side policy tools will also have demand-side effects, such as:
 Industrial policies
o More production  More workers  More consumption
 Cutting personal income taxes
o More disposable income  More consumption
 Reducing unemployment benefits
o Less benefits  More incentives to find job  More consumption
 Abolishing the minimum wage
o Lower cost  Increase output  Increase consumption

Effectiveness
 Constraints on market-based
o Equity issues (Reducing the power of labour unions, Reducing unemployment benefits, Abolishing the minimum wage)
o Time lags more
o Vested interests from certain firms (equity problem)
o Environmental Impacts
 Strengths on market-based
o Improved resource allocation
o No burden on government budget
 Constraints on interventionist
o Costs
o Time lags
 Strengths on interventionist
o Direct support to sectors
o Identify strategic industries