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Macroeconomic Policy And Construction Industry In United Kingdom Economics Essay


The economy can be defined as the circular flow of goods and services from producers to consumers, and the equivalent flow of labour and capital into the production development. Also can be view as the flow of money for the services supplied (Malcolm 2005). Furthermore, ‘economy is monetary activities related to the production of goods and services and measured by currency spent to purchase these goods or services. In the current US economy or most modern economies the total moneys spent is not limited to just goods or services. For example the money made in the stock market is neither a product nor a service but it is part of the modern economy. Economy can also mean saving money by spending less than you would normally spend to provide a particular service or a product’ (Garrett, 2010)

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Macroeconomic policy deals with policy maker to manipulate the behaviour of broad economic aggregates to improve the performance of the economy. Furthermore, ‘the aim of macroeconomic policy is to advanced industrial countries are generally accepted to the attainment of high and steady employment, steady general price level , increasing level of real income(example economic growth), balance of payments equilibrium and certain distributional aims’.(Howard and John ,1993)

The construction Industry is big, complex and diverse and covers a wide range of business interests, united by their common usage and development of land. The construction industry involved clients such as commercial property developers and house builders who decide what should be built and the profitable areas. It involves the designer decide detail on what to built and materials. Also it involves component materials such as manufacture materials, and the contractors. It creates wealth and employment the economy. (Anon. 1996).

Furthermore, this paper shows economic trends and also shows current macro-economic policy. More so, the impact that economic factor has on the construction in industry and also show an understanding of the ways in which macro-economic policies may affect the construction industry. Finally, this papers shows relationship of the economy, macro-economic policy and construction industry in the environment.


The United Kingdom is prosperous country with high standard of living in the world. During nineteenth century the country experienced a tremendous growth in industrialization till early twentieth century. That was more of a service economy and employment in the industry continued to decline while employees working in health, education, leisure and finance continued to increase. (Malcolm, 2005).The UK economy for a long time is facing unbalanced and unsustainable public spending and rising in level of public debt. This (fig 1) is the latest forecast of the UK economy according to (Robert prechter 2010)



The (fig 1) show that strong economic recovery start to improve from 2010 .so, the Bank of England should keep on interest rate at 0.5% for many years beyond stabilizing the economy .From above trend growth 2.8%by the end of 2010

The officer for National statistics enacted economic statistics that measure the UK economy in different methods.

1 The UK economic accounts that make available general view of the economy 1993

2 The European system of account 1995

As the UK economy grows over time, its components will certainly transform in size and structure. For the past 40 years there is constant decline in the importance of the UK manufacturing area, but a similarly stark rise in services. Besides, the UK economy is made up of up five components:


1 The firms

2 The households

3 The government

4 The banking sector

5 The eternal sector

THE FIRMS: This is an important source of growth and income architects in the economy .They provide the economy with jobs, wages and also provide good and services.

THE HOUSEHOLDS: From the employment wages paid by firms will enable them purchase goods and services. By spending the wages, the household will provide the firms with what up to date demand for product and services look like.

THE GOVERNMENT: They provide goods and services to the economy too and use them. The government provide employment like teacher; police and civil servant to enable them provide service to economy. The enact legislation that guide the economy by implement policies for economic operation. The provide school, health centres, road etc, that create goods and services.

THE BANKING SECTOR: This is very important to the economy because the banking industry provide services for transaction money for the government ,household and firms to enable them invest , meet up demand and engage in good and services. By lending to the government, household, and firms they make their profits. For example, from new spending review the British Bankers’ association and the six major banks broadcasted a package industry led measures to advanced access funds to firms that includes a £1.5 billion Business Growth Fund to enable set up and rise small business.

THE EXTERNAL SECTOR: This involves with importation and exportation in the UK economy. This is determined through the balance of payments. Exportation leads to positive effect to the UK economy while importation leads to negative effect to the UK economy because it involves movement of money out the country.

Finally, all these sectors lead to flow of money and products among them .from gaining and analyzing correct information from these component parts that the health of the economy and forecasts for the future of the UK economy can be made in global market.


Macroeconomic policies enable the UK government to achieve certain and develop the performance of the economy. Also, to improve the well -being of citizen who live and work in their economy. It deals with issues, policies and objectives that have an effect on the entire economy. The economic growth, the unemployment rate, inflation rate, balance of payment and exchange rates; these are all UK aggregates and therefore macro issues.

In order to attain this goal, government has implemented main objective these macroeconomic objectives:

1: Economic growth

2: inflation

3: Unemployment

4: Balance payment

5: Exchange rates

ECONOMIC GROWTH: this means the increase in general level goods and services produced in the UK economy. This is measured by the percentage rate of increase of real gross domestic product real (GDP).Real GDP means with effect of inflation is take away. The GDP is made of two main sources: add to in the utilisation of existing recourses and add to actual productive potential. Economic growth leads to alleviate unemployment and developing spare capacity. It improved the invention and introduction of new machinery for high labour productivity. The positive economic growth is profitable to construction industry in so ways, for example; it creates more employment and manufacturing building. The demand for new building will give rise to better economy. Furthermore, it helps the five components of the UK economy. Economic growth in UK is measured in conditions of rate of change of real GDP.In UK real GDP is when the effect inflation is eradicated in the economy.UK growth figures are published quarterly. This figure 1 recent shows UK quarter GDP.

Real GDP quarterly growth

Real GDP quarterly growth

The (fig1) shows that the UK economy is recovering from recession. The real GDP increased for two consecutive quarters. From above it increased by 1.7 % in second quarter of 2010 higher than the second quarter of 2009.Due to government consumption expenditure rose to by 1.0% and is 1.9% higher than the second quarter of 2009.Construction industry rose by 9.5% b compared with the previous.

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INFLATION: inflation refers to process of continually rising prices of goods and services in the economy over a period of time. It is calculated by annual rate of the Retail Price Index.(RPI) known as rate of inflation. When inflation rate zero, it enable the prices of goods and services to be stable. Both the components of the economy and the construction industry prefer inflation rate down to a low percentage. High inflation lead to goods and services to more expensive, may affect the demand from household and the construction industry will decline. These decreases in demand have negative effect firms and the banking sector .High inflation leads to fewer exports in international market, which affect the balance of payment of the economy.


CPI inflation 3.1%, RPI 4.6%

This is a graph showing Annual inflation rates – 12 month percentage change

Annual inflation rates – 12 month percentage change

This shows the consumer price index (CPI) 3.1% in September, unchanged from August, RIP 4.6%.there is upward and downward pressures on CPI annual inflation from august to September. The downward came from transportation and upward came from clothing, footwear and food where the economy experiences the largest upward. Based on international measure of inflation, CPI show that the UK inflation rate in august was above estimated level for European Union. The UK rate of 3.1% percent while EU’s as whole was 2.0%.

UNEMPLOYMENT: Means in UK government an individual that is unemployed but currently claiming unemployment related benefit. Also an individual that is capable and willing to accept an appropriate job. Low unemployment rate is obviously positive the economy. Furthermore, unemployed do not produce goods and services and lead to low demand of goods and services (deflation).The firms will be engulf with less profit that lead to low production. The government send more on benefit and gain fewer taxes from the public. The UK government defined two ways: the inactive and active population working age. Active are the population working while inactive are students, retire people.


Rate rises to 70.7 per cent

These are graphs showing the working age employment rate and the unemployment rate

This (fig 3) shows unemployment rate at 7.7% for June – august 2010.This is down 0.1 on the quarter while the employment rate for aged 16 to 64 was 70.7% up 0.2 on the quarter.

THE BALANCE OF PAYMENTS: This refers to the UK trading relationship with other countries of world. According to (Malcolm 2005) ‘the balance of payment is principally cash flow or sources and utilize of funds statement which shows all transaction that lead either to inflow of money (shown as a credit)or to an outflow (shown as a debit).’ Also is refers as records of all financial transaction that are made between consumers, firms and the UK government across the world. It helps to show how much spent by the UK consumers and firms on imported goods and services. Furthermore show how UK firms are successful in exportation with other countries and global market. This is essential method to determine relative performance of UK economy in the global market. The balance of payment is in two accounts: capital account and current account. Current account measures the trade in goods and services between the UK market and global markets. Capital account measures the flow of money and investment with the UK economy and other countries.

Balance of Payments

Current account deficit reduced

2010 Q2

This is a graph showing quarterly current account balance

UK current account balance: seasonally adjusted

This (fig 4) showed that the second quarter balance is equivalent to 2.0% of GDP, compared to -3.1% per cent of GDP in the previous quarter. However, the income surplus increased by £6.5 billion to £9.3 billion whiles the deficit on current transfer reduced by £0.1 billion to £4.1 billion. This shows that the UK economy is under heavy importation rate.

THE EXCHANGE RATE: This refers to the UK value of pound against other currencies in the world. Efficiency Stability in fluctuations of pound’s value to enable the five component of UK economy functions well. Even the construction industry that based on imported materials. Furthermore, if the value pound drops will lead low exportation and high importation, this may affect the balance of payments.

Finally, the government control the five economic objectives through the use policy instruments like: Fiscal policy and monetary policy

FISCAL POLICY: this refers to government to use many measure to control expenditure and revenue to regulate the level economic performance. The government can increase demand through its own purchases like infrastructures. This has positive effect to firms who make the goods and services available for government. The construction industry as well benefits through execution of the projects and it create employment. Through low taxation to individual and firms, may lead to increase in demand and firms may expand more to create employment and healthy economy. The government can use Budgets to increase or decrease economic activity. Budget is made of three categories:

1: Balanced budget

2: Surplus budget

3 Deficits budget

Balanced budget is used when government want to manipulate the economy. By spending exactly equal to the revenue rose from taxation.

Surplus budget refers to deflationary. The government want to reduce the level of economic performance. Through less spending from the government, may lead to lower level of aggregate of demand.

Deficits budget refers to when government spending more than it is generating through taxes. Lead to increase in level of aggregate demand and increase in economic activity. This system is known as inflationary budget. The government borrow money for extra spending is known as public sector net borrowing (PSNB).while a surplus budget the government can afford to pay back the money it has borrowed is known as public sector debt repayment.(PSDR).From the new UK spending review, the government want to cut down the deficit and hold up the macroeconomic stability. Finally reducing the deficit will lead to continued economic growth.

MONETARY POLICY: This is very essential way to regulate the economy and is used in conjunction with fiscal policy. Monetary policy seeks to influence the level of aggregate demand by altering the supply or the price of money. Monetary policy instruments used are:

1: Money supply control

2: Credit or hire purchase control

3: Interest rates

The bank’s monetary policy aim is to restore price stability (low inflation) and support the government’s economic objectives like economic growth and employment rate. The remit recognises the function of price stability in achieving economic stability and in providing the right conditions for sustainable growth in output and employment.

CONSTRUCTION INDUSTRY: The UK construction is made the building and civil engineering work. The construction sector is large, complex and covers a wide range of business interest and activities that has do with usage and development of land. The construction industry is very essential for the UK economy and it account for 10 per cent of UK’S GDP and employs 1.5 million individual. The UK government commitment to construction project within healthcare and education has assisted to strengthen growth in the economy over the past few years. For example, the construction industry at the end of 2008 employed over two million people and accounted for 6 per cent of national economic output of £123 .6 billion. Due the current recession, there is decline in the construction sector in the economy. Besides, the construction sector is the main driver of growth in other sectors due to heavy supply of materials and the employment demand. The construction industry depends small on importation, which leads to investment generation of economic activity within the UK. Also it leads to investment rather than consumption, which lead to important long-term economic and social benefits to the UK. The government use construction investment helps to stabilize the economy that leads to industry’s key point to national development policy. The construction sector is labour intensive than many other industries with regards to manufacturing. Finally UK’s construction industry is the fastest growing sector in the economy according to office of national statistics.


From above, the economy, macroeconomic policy and construction sector have significant impact in development of the country. They all related to each order for balance and sustainable economy. For the UK economy to be stable and constant in growth, the UK government need to insure that the economy, macroeconomic policy and construction sector is efficient and mutual co-operation among them. It makes sense for the government to use these measures to control inflation and interest rate. According to IMF and OECD, recently UK government spends £43 billion on debit interest, which may delay the recovery progress. Furthermore, there need for efficiency between the relationship of fiscal policy and the business cycle. According to report from the office for national statistics, construction sector shining since last three mouth. So the government should permanent invest on construction projects that are vital to the long term future of the UK economy. The construction industry remains the most concerned sector because the private sector and commercial output depend on them. The demand for construction is linked to increase demand for other economy sectors. Also there is need for well-organized financial sector the economy. The government should go ahead the recent efforts to recapitalize the banking sector to enable them keep up credit levels the economic recovery. There is high need for credible and consistent polices alleviate downside risk and build up market confidence such as, setting monetary and fiscal policies fixed with a concrete commitment to the existing policy aims of price stability and fiscal sustainability. Finally the government’s well-built and reliable multiyear fiscal deficit reduction plan is important to ensure debt sustainability.


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