Draft Notes

Notes: TM 321 Project Appraisal and Project Planning

INTRODUCTION TO MICRO AND MACRO ECONOMICS

One of the many acceptable definitions suggested by Samuelson ( in Economics, an Introductory Analysis, New York McGraw Hill, 1976) is suitable for our purpose. He proposed the following definition: Economics is a study of how men choose to use scarce resources or limited productive resources (land, labour, capital goods such as machinery and technical knowledge) to produce various commodities (such as wheat, overcoats, roads, concerts, and yachts) and to distribute them to various members of society for their consumption From the above, engineering economics may therefore be defined as the study of how engineers choose to optimize their designs and construction methods to produce designs or objects which will optimize their efficiency and hence the satisfaction of their clients Economics is conventionally and conveniently subdivided into two main streams: Microeconomics that aim at studying the economic laws on a scale as affecting a small firm; whereas Macroeconomics is the study on the national and international scale as affecting the wealth of a society. 1.1.2 Historical Origins

Modern economics has developed from the classical School the father of which was Adam Smith whose classic The Wealth of Nations was published in 1776. Two important concepts were derived from this: The first was the theory of specialization, in which he proposed that through specialization, productivity could be improved significantly. This has led to the current system of specialization in professions, trades. Engineers would be less productive if they were also economists, lawyers, doctors, priests etc. The second was that at individual level, everyone pursued goals for their own good, which at a collective level led to overall good for the society. It follows that interference in by governments led to upset the balance and reduced the total common good. This is the fundamental principle of market economy. 1.1.3 Perfect Competition

This is defined as the case where no individual producer (or consumer) be he an engineer, farmer or labourer, has any personal influence on the market price. It is this state of affairs, which underlies basic micro-economic theory, and theories of imperfect competition, where there is government interference in the market or where one producer or consumer is large enough to affect the market price are developed from it.

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TM 321 Project Appraisal and Construction Planning Prof. NM Lema,

Draft Notes 1.1.4 The Concept of Costs

In economics, it is convenient to break down costs into: Fixed costs these are inescapable costs which are unavoidable and do not change with use. For example, if we want to construction a building, we must have site office and associated services. This constitutes fixed cost. This cost must be allocated to the price of the building, which the Client should pay for. Variable costs these increase with output (production). For example, if labour cost for building one square meter of blockwork is Tshs. 2000/=, then the more the output the more the labour costs. Total costs these are total costs (of production), which will increase with production. These are more relevant when we discuss project cost control. 1.1.5 Factors of Production

In the language of economists, articles produced, sold or exchanged are known goods. A good may be tangible or intangible. In order for a good to be produced, four factors (of production) are necessary: labour, land capital and enterprise. Labour includes all labour from site labourer to the paid manager. It is obvious that without labour and skill nothing can be produced. Land includes not only land but also buildings the physical location where production can take place. Capital money or capital available, but in the long run it includes machinery, tools, and materials since with money such equipment and materials can be acquired, Enterprise This is the fourth factor and is less tangible (difficult to quantify). This means the initiative to organization the factors of production and to take the risk doing that. Thus, a construction articles manufacturer establishes a company (enterprise), secures location (land and possibly building), capital and labour which together he/she can organize to produce the articles he/she plans to sell. 1.2 The Concept of Macroeconomics

Macroeconomics deals with wealth of society. Issues that are addressed here include economic growth, inflation, employment, and price levels. Economic growth of any nation is a very basic concern governments address though their macro-economic policies. The following, for example is an extract from the last Budget Speech of the Minister of Finance, URT: ..Mr. Speaker, macroeconomic and fiscal developments during 2000/2001 are on track and in line with governments objectives and targets. GDP grew by 4.9 percent in real terms in calendar year 2000 compared with 4.7 percent in 1999. Inflation rate fell to 5.3 percent during the period ended March, 2001 and is expected to decline further to 4.9 percent by end June, 2001. We need the economy to grow at more than 8 percent per annum in real terms, then we can be confident of a sustained basis for reducing poverty. When the economy grows at a higher rate, the tax base for domestic revenue expands and the capacity of government to finance poverty reduction and other national development activities will increase.
(Source: http://www.tanzania.go.tz/government/hazina.html

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TM 321 Project Appraisal and Construction Planning Prof. NM Lema,

Draft Notes Economic growth is measured using indicators such as Gross National Product (GNP). This is defined as the annual summation of both personal and government expenditure on goods and services plus that of investment on all new machinery and construction. In other words, the total wealth created by the nation, including income from outside the country for one year. The indicator is normally expressed in GNP per capital. It was estimated that per capita GNP was $210 in 1997. At a growth rate of 4% p.a. in real terms, the estimated GDP by 2002 was about 255 USD per capita (compare with Mozambique at USD 133 in 1995; Kenya USD 375 in 1995; RSA at 2165 in 1995, Japan at 24, 104 and Switzerland at USD 26, 721 in 1995). (From another source on the WWW)
Gross National Product. GNP is the total value of all final goods and services produced within a nation in a particular year, plus income earned by its citizens (including income of those located abroad), minus income of non-residents located in that country. Basically, GNP measures the value of goods and services that the country's citizens produced regardless of their location. GNP is one measure of the economic condition of a country, under the assumption that a higher GNP leads to a higher quality of living, all other things being equal.

An indicator closely related to this is Gross Domestic Product (GDP) which is the annual summation of both personal and government expenditure on goods and services plus that of investment on all new machinery and construction except that which is not generated locally. It therefore excludes the investment from outside the country, loans, grants etc. (From another source on the WWW)
Gross Domestic Product. The total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports.

Another important indicators of economic growth is the Gross Fixed Capital Formation (GFCF). According to United Nations (1998), GFCF is the gross expenditure on fixed assets, construction products such as buildings, roads, airports, railways, and such other major construction products.. In other words, it is the national assets that can be used to general wealth for the nation and therefore the more the fixed assets, the greater the possibility of contributing towards the GDP. In general, the construction industry contributes about 50% to the GFCF. It is therefore very important towards creating assets necessary for national wealth creation. Employment is another classical indicator of the performance of the economy. The more people in employment, the better the economic performance. This is particularly true in industrialized countries in which the economy depends largely on manufacturing. In some of the developing countries where subsistence is dominant, the official employment figures are still very low. Whereas official statistics published by ILO in 1998 indicated that in only 5.1 % of the active labour was employed in industry whereas in the same year 41.1 % was employed in industry in South Korea. Several other indicators (including alternative indicators) are used but are beyond the scope the subject matter at hand for the moment. For those who are more interested in these issues, you can visit http://www.freetheworld.com/release.html.

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TM 321 Project Appraisal and Construction Planning Prof. NM Lema,