The construction industry in a macro-economic fix

Abstract

Before I start I would like to say a few words about the economic process. The economy is basically made up of two components: the flow of money and the flow of goods, which cross each other when people buy and sell. Goods are produced, production generates money, and money is used to buy other goods and services. Thus in a perpetual cycle, the national income is earned and spent. Now from this main stream a secondary flow branches off, made up of savings out of that income, which are to a major extent attracted via the capital market by those who wish to purchase capital goods (and also consumer goods). I say to a major extent, because part of the savings take the form of retained profits, which are invested directly into the own enterprise. The central government fulfils a special rôle in this cycle, tapping part of the national income through taxation, and borrowing in the capital market to finance the rest of its expenditure. Then there is also an outflow of money to other countries, but then again we also have an inflow from abroad. These flows are generated by activities such as the purchase and sale of goods and services, notably tourism, and lending to and borrowing from non-residents. It is these flows which determine prices. Prices show us the value of goods, while interest rates indicate the value of money.