Analysis Of Macroeconomics And Construction

Introduction

Macroeconomics is the study of the economy as a whole, and the variables that control the macro-economy (Chapter 10 Macroeconomic Variables, n.d.). Macroeconomics can be classified as a public good, as it has the unique characteristic of being non-divisible and nonexclusive, meaning it can be shared with all in order to be enjoyed (Chapter 10 Macroeconomic Variables, n.d.).

Macroeconomic variables or factors, however, are influential fiscal, natural, or geopolitical events that broadly affects a regional or national economy. They tend to impact wide swaths of populations, rather than just a few select individuals (Bloomenthal, 2019). This would include variables such as the Gross Domestic Product (GDP), the Gross National Product (GNP), inflation, recession, and many others.

Like all experts, in order to do a good job of macro-managing the economy, the government must study, analyze, and understand the major variables that determine the current behavior of the macro-economy (Chapter 10 Macroeconomic Variables, n.d.). So government must understand the forces of economic growth, why and when recession or inflation occur, and anticipate these trends, as well as what mixture of policy will be most suitable for curing whatever ails the economy (Chapter 10 Macroeconomic Variables, n.d.). Policies such as the monetary and fiscal policies and other various regulations can impact state and national economies, while potentially triggering broader international implications (Bloomenthal, 2019).

Discussion

Inflation would be described as an increase in the amount of money, without a corresponding increase in the supply of real goods means that prices rise (Sowell, 2000). Inflation is classified into three types: Demand-Pull inflation, Cost-Push inflation, and Built-In inflation (Chen, 2020). The demand pull inflation is caused when there is in increase in consumer demand but no increase in supply. The cost push inflation which is caused by a shift in the production costs which increases consumer prices. The built in inflation happens when the price of goods and services rises, which allow for labor to expect and demand more costs/wages to maintain their cost of living (Chen, 2020).

There are ways to measure inflation. The most commonly used inflation indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI) (Chen, 2020). The CPI is a measure that examines the weighted average of prices of a basket of goods and services which are of primary consumer needs. They include transportation, food, and medical care (Chen, 2020). On the other hand, the WPI measures and tracks the changes in the price of goods in the stages before the retail level. This usually include items at the producer or wholesale level (Chen, 2020). The CPI is much more widely used especially by banks and governments to see how well the economy is going during this time.

With this in mind, this macroeconomic condition is one where with an increase in prices there comes an increase in interest rates, which many whom wish to invest usually shy away from. This rise in interest rates would be caused by governments and financial institutions, in order to discourage would-be money borrowers and so reduces the volume of liquidity (Chapter 10 Macroeconomic Variables, n.d.).

Inflation can be controlled by banks exercising their monetary strength. Such banks as the Federal Reserve in the US and the Bank of Jamaica (BoJ) utilize the control over the economy to change the pace of economic activities. This in turn controls the rate of inflation to a manageable degree. The method commonly used is to change the interest rate. Either to increase or decrease the return, in most cases this is done to the short term interest rate (Pacific Investment Management Company, (PIMCO), n.d.).

Lower short term rates increases the amount banks can borrow from central banks and how much a bank can borrow and trade with another. This increases the supply of cash flowing into the market. This gives banks more power to loan to businesses and consumers, which promotes economic activities. In the entire market, inflation generates as the economy grows. To remedy this, the central banks utilize the opposite of decreasing the interest rate, which is to increase it. This has the opposite effect on the market. Ergo causing banks to borrow less money make less loans or at higher rates to businesses consumers and other banks. This method successfully hampers the rate of inflation. (Pacific Investment Management Company, (PIMCO), n.d.).

What should also be noted, that if interest rates are low, companies and individuals can borrow cheaply to start a business, earn a degree, hire new workers, or buy a shiny new boat. Therefore, low rates encourage spending and investing, which generally stoke inflation in turn (Floyd, 2019).

By raising interest rates, central banks can put a damper on investments. When there is not so much cash sloshing around, money becomes scarcer. Economist theorized that for investments to be stimulated the stock of money needed to be increased so that interest rates would decline. That scarcity increases its value, although as a rule, central banks don’t want money literally to become more valuable: they fear outright deflation nearly as much as they do hyperinflation. Rather, as suggested before, they tug on interest rates in either direction in order to maintain inflation close to a target rate (generally 2% in developed economies and 3% to 4% in emerging ones) (Floyd, 2019).

Other ways to curb inflation is through the use of policies, such as the monetary and fiscal policies. The monetary policy according to the Bank of Jamaica Act (1960) is the conduct of monetary policy is aimed at regulating the growth of money and credit in line with the resources expected to finance economic activity and generate employment, without undermining the conditions of price stability (Bank of Jamaica, 1960). Fiscal policy, on the other hand, is how elected officials influence the economy using spending and taxation. It is used in conjunction with the monetary policy, and it influences the economy using the money supply and interest rates (Amadeo, 2020). It should be noted that the attempts to affect the economic environment with the monetary policy through the monetary authority works faster than the government attempts with the fiscal policy. The vote to raise or lower the rates at which the government intervene can take as much as 6 months to take effect throughout the whole market. Legislators should coordinate to make fiscal policies work with monetary policies but is hampered because of political biases or priorities (Amadeo, 2020).

Central banks manage money supply through the monetary policy, and this occurs in their home region. The central banks lower and increase interest rates to enforce this policy. To either release or tighten the amounts for reserve requirements is a common method used to implement the policy. The reserve requirements is the amount a bank has to have deposited with the central bank or as cash on hand. Increasing this requirement will decrease the lending amount of banks, thus stifling the economy. On the other hand decreasing the amount will allow banks to lend more stimulating the market (Pacific Investment Management Company, (PIMCO), n.d.).

The monetary authority is tasked with reducing inflation and the interest rate. Through the implementation of monetary policies, this is to control the interest rate (payable on very short term borrowing or the money supply). Such polices were implemented to deter a recurrence of any economic depression. Through the use of fiscal policies, however, the government decides on the goods and services it purchases, the transfer payments it distributes, or the taxes it collects. The primary economic impact of any change in the government budget is felt by particular groups which goes on to raise their disposable income (Weil, n.d.).

Discussions of fiscal policy generally focus on the effect of changes in the government budget on the overall economy. Although changes in taxes or spending that are “revenue neutral” may be construed as fiscal policy—and may affect the aggregate level of output by changing the incentives that firms or individuals face—the term “fiscal policy” is usually used to describe the effect on the aggregate economy of the overall levels of spending and taxation, and more particularly, the gap between them (Weil, n.d.).

In light of this, when a government make attempts to fight inflation through fiscal policies, it should be noted that not all economics can attest to the efficacy of these polices. Attempts such as raising or reducing taxes or reducing spending can alter the market, but to a degree. These attempts will put a dampener on the economic activities (Pacific Investment Management Company, (PIMCO), n.d.).

Construction refers to building and infrastructure works in sectors such as energy, defense, and transportation, in both individual and commercial residential areas. The construction sector includes infrastructure such as transportation systems, bridges, dams and irrigation systems, ports, airports, oil pipelines, as well as trendy buildings, such as residential and shopping centers. Project design and management of construction are usually carried out by skilled experts (Berk & Biçen, 2018).

It is common knowledge that the economy is stimulated by the construction industry on a positive level. This is based on the amount of jobs created by the industry, directly or indirectly, and also stimulating the demand for goods branching out into separate sectors of the market. Ergo this industry plays an important part in the economic growth of the economy. Considering how there is such a strong connection between the construction sector and other sectors in the market and the impact it provides in the employment rate and economic growth, it is accepted as a powerful driving force in any economy. Seeing as it is such a pivotal market for the country, the government tends to invest into its development. They often seeking to reap the rewards nationally from the horde of exploits it provides. (Berk & Biçen, 2018).

With this in mind, if the economic condition of inflation is indeed rocking the economy, governments would want to deter investments in the sector, in order to, as stated before, lower the liquidity of money in the economy. Seeing that this sector has a wide reach, the use of monetary and fiscal policies specific to this sector would then ripple into other sectors, thus making room for the economy to recover and to become more stable.

In essence, government policies, international credit institutions, decisions affecting policy and the economy have a straight impact on the development of the construction sector. It is directly influencing the operation of firms in this area, preferably of the authority that invests or makes the investment decision (Berk & Biçen, 2018).

Conclusion

Inflation, a macroeconomic condition, can be curbed through the usages of monetary and fiscal policies. They will incite either a raising or lowering of interest rates, which directly affect investments in a sector, and by large the economy of the country it is implemented in.

Most governments believe that the construction sector plays a powerful role in economic growth, in addition to producing the structures that add to our productivity and quality of life (Dlamini, n.d.). However, inflation, and the subsequent policies used to curb it, will cause for investments in the sector to decrease.

References

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2. Bank of Jamaica. (1960). Monetary Policy. Retrieved from Bank of Jamaica: http://boj.org.jm/monetary_policy/
3. Berk, N., & Biçen, S. (2018). Causality between the Construction Sector and GDP Growth in Emerging Countries: The Case of Turkey . Athens Journal of Mediterranean Studies- Volume 4, Issue 1, 19-36.
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5. Chapter 10 Macroeconomic Variables. (n.d.). Retrieved from http://webhome.auburn.edu/~gadzeat/macro-variables.htm
6. Chen, J. (2020, March). Inflation. Retrieved from Investopedia: https://www.investopedia.com/terms/i/inflation.asp
7. Dlamini, S. (n.d.). Relationship of construction sector to economic growth. Retrieved from School of Construction Management and Engineering, University of Reading, UK: https://www.irbnet.de/daten/iconda/CIB_DC25660.pdf
8. Floyd, D. (2019, September). 9 Common Effects of Inflation. Retrieved from Investopedia: https://www.investopedia.com/articles/insights/122016/9-common-effects-inflation.asp
9. Pacific Investment Management Company, (PIMCO). (n.d.). Understanding Inflation. Retrieved from PIMCO: https://global.pimco.com/en-gbl/resources/education/understanding-inflation
10. Sowell, T. (2000). Basic Economics, A Citizen’s guide to the Economy. Basic Books.
11. Weil, D. N. (n.d.). Fiscal Policy. Retrieved from The Library of Economics and Liberty: https://www.econlib.org/library/Enc/FiscalPolicy.html