Overview
Aggregate supply reflects the amount of product that an economy can produce. It is driven by the amount of both capital and labor available (and therefore typically the amount of income)
Forecasting
The aggregate supply curve is thought to be slow moving. That is, it is dictated by the amount of factories and other hard investments that an economy has made and that take longer periods of time to play out. As such, forecasting aggregate supply in the short in medium term is mostly done utiliizing standard time series anlaysis to identify whatever trends are currently present in the data.
- Forecasting Changes in Labor Supply - any factor that affects the supply of labor (see labor economics) is a factor that will be relevant to aggregate supply. This can include both government policy, but also demographic changes.
- Supply of Capital - the supply of capital is primarily affected positively by business investment, and negatively by wear and tear.
- Technology and Innovation
(see Economic Growth for more information)
Aggregate Supply Based Policies
Aggregate supply is harder to target with policy than aggregate demand.
- Tax breaks for business or investments are seen as being pro-business and supporting an increase in supply.
- Deregulation is also seen as supportive of business and therefore supply.
- Government spending on infrastructure can have supply side effects, making it easier for business to transport their goods among other benefits.
- Government sponsored research and development and education also servers to prop up supply, but clearly only over the long run.