Supply-Side Economics and the NZ Economy

Supply side policies have the objective of raising the economy’s supply potential and in conjunction with fiscal policy can improve productivity and boost overall supply. It mainly takes the form of tax incentives, investment opportunities, and training of the labour force. It also focuses on reducing the cost burden on businesses.

The BNZ Markets Outlook produced a very interesting article on supply-side issues in the NZ economy. The graph below shows the gap between the capacity of the NZ economy against the aggregate demand. Where the line is 0 – supply = demand and there is no output gap. Above the line there is excess demand and below excess supply.

Interesting that between 2004-2007 the slowing levels of growth reflected the lack ability to increase supply into the market – approaching the inelastic part of the aggregate supply curve. This was in contrast to the official view which led us to believe that demand was slowing. With the pressure on supply, prices started to rise as did wage inflation.

The RBNZ, around 2005/06, was projecting the economy to open up some spare capacity by 2007/08. The economy actually moved into a state of greater excess demand. The difference was like failing to forecast a 4% pick-up in GDP growth.

One thought on “Supply-Side Economics and the NZ Economy

  1. Simon July 6, 2012 / 9:11 am

    The RBNZ could not forcast a what happened in 2008. It did not understand what was happening in 2004 – 2007. Both these movements in demand were generated on Wall Street and in particular led by the Federal Reserve Bank of New York.
    What happens next for the New Zealand economy will be dictated by what the ECB does and what the PBOC does. The RBNZ should focus on understanding how the actions of hese anks may influence our reconomy.


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