Macroeconomics, microeconomics and the construction industry

Introduction:

The construction industry is considered as one of the important industries in the world, however in Europe the percent of workers in this sector is 7% (OECD,2008). this industry relates to construct and maintain the buildings such as; houses, schools, hospitals, factories, offices, roads, bridges, ports and other constructions. the construction industry were developed to contain several sectors and departments in order to manage construction projects especially large projects such as the government’s construction projects which include highway streets and infrastructures of the cities.

This industry like other large investments also needs a specific management system to reach desired aims and objectives of each project. This report will analyze the relationship between macroeconomics and the construction industry, and to evaluate and discuss the effect of / on macroeconomics of this industry.

Construction Industry:

From the civil engineering view, the construction industry can be defined as a process which relates to build and assemble of infrastructure. activities of the construction in UK may be classified according to three types which are: the residential works (homes, offices and others) which are sharing around 26 % construction output in England, non residential works with 56 % of total English construction’s output , in addition the infrastructure works are considered small, an example in France (36% of total output) with very large population , in other words in this case a large infrastructure is required. also, it can be noted that industry of the construction across Germany, France, US and UK is heavily skewed towards firm investments where they are considered less important than the other types of investments.(Dean Kashiwagi, et al. , 2009) These types are summarized in Figure (1).

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Figure (1): Types of Construction Industry

2.1 Construction Industry Structure (CIS):

The most important factors which effect on the CIS are the performance and the competition between three types of construction discussed previously, and the general CIS will discuss in Table (1):

Table (1): Construction Industry Structure.

Negotiated-Bid

Owner selects vendor

Negotiates with vendor [1] 

Vendor Performs

Best Value

Performance and price

Contractor creates baseline plan

Contractor justifies and measures deviations

Contractor is technical expert

Unstable Market

Price Based

Specifications, standards and qualification based

Management, direction, control and inspections by client’s professional

Client professional is technical expert/ decision maker

From Table (1), it can be noted that the Unstable Market is less performance and competition, the Negotiated-Bid achieves high performance with less competition, the Price Based has high competition due to the price with low performance however this type depends on minimizing the costs. Best Value is considered an important target depends on the investor achievement either high performance or competition by performing a good management between two factors of evaluation.

2.2 Gross Domestic Income (GDP):

It is a measure of the total amount of service and goods which produced by people in specific country during one year. And it shows the productivity of country so it relates to the national account and macroeconomics.

Table (2) gives an indication for the industrial construction of UK, France, Germany and USA in 1999:

Table(2): GDP of the construction industry in 1999 [2] 

Country

Construction

GDP

UK

0.650

0.722

France

0.973

1.343

Germany

0.978

1.147

USA

1.000

1.000

Table (1) shows that the percent of the GDP in UK is about 65% which is small in comparison with the other countries especially USA which reaches to 100 % GDP for all construction investments.

Macroeconomics & Microeconomics:

The macroeconomics is responsible to estimate the productivity of construction industry in many countries such as UK, Germany and France by including statistical data about the numbers of employers and the actual labor for each one in the different countries where the productivity is affected by the power of the money from country to another.

Macroeconomics:

The economical science which studies and examines either the aggregate phenomena of the economy or economy – wide changes such as the price indexes and inflation levels, rate of market growth, national income and the unemployment. Figure(2) explains the relationship of the Macroeconomics (Dilts. D, 2004).

http://www.econguru.com/wp-content/uploads/2008/05/736px-circulation_in_macroeconomics.png

Figure (2): The relationship of the macro economics. [3] 

Microeconomics:

It is a branch of economy science which studies and analyzes the behavior of the market for individual consumer and firms in order to obtain a good understanding for the decision making, also the microeconomics relates to the relationship and interaction between the producer and customer to study the factors which effect the interaction between them, in addition to determining prices and output in the market. (Dilts. D, 2004)

Keynesian Economics’ Approaches:

The Keynesian economy is a theory of macroeconomic generated by British John Maynard Keynes at 20th century which encourages and argues the idea of non efficient outcomes of macroeconomics and results a policy which includes financial sectors such as; monetary policy of central bank and fiscal policy.

In 1990, the world started using the New Keynesian macroeconomics as a new theory due to increasing economical frequency and the economists started developing new theories related to the classical one, New Keynesian economics is considered a macroeconomic which is found to provide foundation of microeconomic as a result of the criticisms of classical macroeconomic theories. The two conjugate assumptions can be used; assumes wages and prices which don’t make changes in the conditions of the national economy, moreover this theory describes either government or central bank as basic stabilizers for the macroeconomic outcomes.( Colander D,2003)

So, the monetarists’ opinion of the relationship between the macroeconomics and the construction industries that the construction is considered as the base of the outcomes and employment resources for any country including UK, this industry is described as critical industry where it intersects with the national development in the country. Therefore, the role of government in order to manage and support it to secure the poplars cannot be neglected.

Macroeconomics & Constructions:

The macroeconomics can be described as an international economy, where are some objectives should be taken in the consideration by the governments of a country in order to overcome the complexity and difficulty of national economy policies. The objectives of macroeconomics of UK are: (Delic M. and Kragulj D.,May 2005)

The inflation firmly should be controlled at any time by achieving the highest priority.

Reaching high value of GDP and employment while taking the inflationary consequences in consideration.(British approach) as shown in Figure (3):

http://www.bized.co.uk/virtual/bank/images/phillips.gif

Figure (3): Pillips Curve for the inflation percent and the unemployment of UK [4] 

The trade deficit should be taken into account by the government although it can be neglected where it relates to the level of short term trade and the power of spending of consumers in the country.

In UK, the rising in the construction materials such as steel, cement and other materials will effect strongly in the inflation rates in general as the inflation rate will effect on the construction prices where the constructions considered as the second most important industry for the population after the food and drink industries.

on other hand, the value of the GDP for the construction industry is the largest value comparing with the other industry in UK. So it will effect in the total GDP value in UK as a result of the total income taxes to the government.( Roy S and Reddy S, 2010).

Role & Effectiveness of Construction Industry in Macroeconomics:

The production of construction industry in England in 2000 was around 7% (Myers, 2004). On other hand, in 2006/ 2007 the employment of this industry in UK reached to 7% of the total employment (BIS, June 2006) which is high comparing with the same one for US which was 5.1 % (Rose, et al., 2007) while the government of UK start applying the policy of macroeconomics to stable economy.

Both monetary and fiscal policies have been used by different governments to directly manage and organize macroeconomics (Myers, 2004). In UK, the interest rates were reduced by the bank of England from 1.5 % to 1% since the beginning of 2009 same as Japan and China governments. The US’s action, in February 2008, was more effective in solving the recession where the government has generated a pair of packages, the first one concern on reducing the tax and incentives, but it was unable to increase the percent of employment and the value of GDP so there is need to another package of bills was about $ 787 billion which continued the same system depending on the tax and interest rate reduction. (Cristina, et al., Jan 2009).

It can be noted that bank system lost its confidence because of the recession, it will need time to get back the confidence. firstly, the mission is summarized by pushing English back to work and to make investment by minimizing tax and interest rate on the labors especially commercial one in order to encourage construction companies keeping operation and later on increasing their investment.

One of the advantages of construction industry is finding many employment opportunities for large amount of people, the most employees are low and middle income workers who will be effected in any change in the current recession, so if the government encourage starting and expanding the investment in this sector, which will give there are many jobs will be generated which will the employment percent in UK.

Conclusion:

The construction industry is considered as one of the largest industries in the world where it participate in the largest percent of employments and national income in most countries, in UK, it may be classified into three types; the residential, non residential works and infrastructure. Construction Industry Structure can be satisfied into Negotiated-Bid, Best Value, Price Based and Unstable Market and the approach of any organization is to reach the best value which is the best type achieve maximum performance and competition.

GDP is a measure of the total amount of service and goods and the percent of the GDP in UK is about 65% which is small percent. The macroeconomics are responsible to estimate of the productivity of construction industry in many countries such as UK but the micro economy are the economy’s section which studies and analyzes the behavior of the market for individual consumer and firms, and the macroeconomics considered a study in the national scale but the micro economy is for a company or a popular.

Control inflation increases either GDP or employment and trade deficit are the objectives of macroeconomics in UK. New Keynesian economics are considered a macroeconomic is found to provide foundation of microeconomic as a result of the criticisms of classical macroeconomic theories.

Both monetary and fiscal policies have been used by different governments to directly manage and organize macroeconomics. The mission is summarized by pushing English back to work and to make investment by minimizing tax and interest rate on the labors especially commercial one in order to encourage construction companies keeping operation and later on increasing their investment.