Civil Engineering Reference
In-Depth Information
This scenario is not too far removed from the immediate post-war reality.
The government policy was to invest in the construction industry to increase the
general volume of economic activity. Construction was specifically chosen because
in most countries it was, and still is, a labour intensive activity, and it plays an
important role in the development of the productive capacity of the economy. In
fact, many post-war economists regarded the construction industry as a 'regulator'
of the economy. On this basis a large group of contractors put forward a case for
continued public sector investment during the recession of 2009, claiming that for
every £1 invested on construction, output would increase GDP by £2.84. They
argued that in relative terms construction relies less on imports than other sectors
(such as motor manufacturing), so the additional activity would significantly benefit
the UK (UKCG 2009). In other words, supporting jobs in construction should
promote further employment in the economy as a whole.
Aggregate Demand
A central part of Keynesian analysis is
aggregate demand
(AD).
Aggregate demand can be defined as the total spending on goods and
services produced in a whole economy.
At the beginning of this chapter we considered total expenditures on a theoretical
level in a two-sector economy. In such a model, aggregate demand would be equal
to consumption expenditures (for example, on beer and chocolate) by households
and investment expenditures (for example, on buildings and machinery) by
businesses. In reality, however, we need to add government expenditures (such as
on road construction) and export revenue from UK output (such as US purchases of
Jaguar cars). Aggregate demand (AD), therefore, consists of four elements: consumer
spending (C), investment spending (I), government spending (G) and expenditure on
exports (X). Aggregate demand is the total of these four elements once one further
adjustment is made: to be technically correct, spending on imports (M) from abroad
needs to be subtracted as this is not money spent on UK products. It is traditional
for the shorthand notation to be used to express aggregate demand using the
formula:
AD = C + I + G + X - M
At this juncture you could be excused the feeling of déjà vu. Earlier in this chapter
we discussed national income accounting and derived a monetary value for
economic activity. Aggregate demand is in fact analogous to GDP.
Table 13.2
shows
the components of UK aggregate demand in 2010.
Demand management techniques proved to be a difficult tool to use. One of the
difficulties was the timing of the action. It becomes particularly difficult when the
sector used for delivery is construction, as the time lags tend to be long and variable.
A second and more obvious problem was overshooting - adding a too large injection
which causes the economy to overheat. The subsequent excess demand achieves
nothing except continually increasing prices - resulting in higher inflation. In short,
it proved very difficult to use demand management techniques to shift aggregate
demand to the precise level to secure full employment at the right time.
