Supply-side policies aim to boost the productive capacity of the economy and shift the supply curve to the right. These policies can accelerate supply-side improvements that typically occur over time due to private sector actions like investment. The government can use these policies to enhance and expedite these improvements, either across the entire economy or in specific markets to promote growth.

There are two primary categories of supply-side policies:

1. Market-Based Policies:
   • Designed to enable the free market to function efficiently by eliminating entry barriers and promoting competition.
2. Interventionist Policies:
   • Aimed at addressing market failures, situations where the free market struggles to allocate resources efficiently.

One of the key interventionist policies, commonly discussed at AS and A-level, involves government investment in training and education (T&E), which contributes to human capital development. For example, the UK government allocated £400 million to schools in 2019 and plans to increase teachers' salaries to £30,000.

Supply-side policies play a crucial role in enhancing an economy's long-term growth potential and overall efficiency.

The effects of Supply-Side Policy, such as Training and Education, on economic growth can be summarized as follows:

1. Increased Workforce Productivity: Training and Education policies lead to a more skilled and productive workforce. Higher worker productivity means the economy can produce more goods and services with the same amount of inputs. This increased productivity results in a rightward shift of the Long-Run Aggregate Supply (LRAS) curve, indicating an expansion in the economy's productive capacity.
2. Aggregate Demand Expansion: Government spending on training and education contributes to the aggregate demand (AD). As mentioned earlier, this boost in government spending shifts the AD curve to the right. According to the multiplier effect, an initial increase in government spending in the circular flow of income leads to a proportionally larger increase in national output, stimulating economic growth.

Effects on Unemployment:

• Initial Reduction in Unemployment: Government expenditure on T&E boosts aggregate demand, leading to a reduction in the unemployment rate. As labor is a derived demand, firms hire more workers to meet increased consumer demand, leading to a decrease in cyclical unemployment.
• Reduction in Structural Unemployment: T&E equips workers with various skills, reducing the issue of structural unemployment caused by occupational immobility. Workers can more easily switch jobs due to improved skill compatibility with firms' requirements.

Effects on Inflation:

• Balance of Demand and Supply: While T&E increases aggregate demand, the inflationary pressures are countered by the outward shift of the Long-Run Aggregate Supply (LRAS) curve. If both curves shift outward by a similar amount, inflationary pressures are mitigated. However, real-world scenarios may vary.
• Potential for Price Reduction: An alternative perspective suggests that prices may fall due to economies of scale. As firms experience increased demand, they can achieve cost efficiencies, resulting in lower average costs and potentially lower consumer prices.

Effects on the Current Account:

• Improved Price Competitiveness: If prices fall or remain stable due to T&E, UK goods and services become more price competitive in international markets. This can lead to increased exports as foreign consumers are attracted to the lower prices. A boost in exports, assuming imports remain stable or decrease, would reduce the current account deficit.
• Enhanced Financial Account: Economic growth resulting from T&E historically attracts more Foreign Direct Investment (FDI). Higher profit margins and domestic demand make the UK more attractive to foreign firms, leading to increased FDI. This improvement in the financial account can contribute to a reduction in the current account deficit.