I Structure defined

An economy may be analysed in terms of its com­ponent parts, often called ‘sectors’. Sectors may be widely drawn to include groups of industries (e.g. the engineering industries) or narrowly drawn to identify parts of industries (e.g.

1 The primary sector - includes activities directly related to natural resources, e.g. farming, mining and oil extraction.

2 The secondary sector - covers all the other goods production in the economy, including the process­ing of materials produced by the primary sector. Manufacturing is the main element in this sector which also includes construction and the public utility industries of gas, water and electricity.

3 The tertiary sector - includes all the private sector services, e.g. distribution, insurance, banking and finance, and all the public sector services, such as health and defence.

4 The goods sector - the primary and secondary sectors combined.

5 The production industries - includes the entire sec­ondary sector except construction, together with the coal and coke industries and the extraction of mineral oil and natural gas. There is an index of industrial production on this basis, and the term ‘industry’ usually refers to this sector heading.

Structural change means change in the relative size of the sectors, however defined. We may judge size by output (contribution to Gross Domestic Product (GDP)),¹ or by inputs used, either capital or labour. Usually more attention is paid to labour because of the interest in employment and also because it is more easily measured than capital.

Through time we should expect the structure of an economy to change.

The pattern of demand is also responsive to changes in the age structure of the population. The UK, like other developed countries, is experiencing important demographic changes which meant that by 2010 there were 0.8 million fewer people in the 16-24-year- old age group than in 1981. So, for example, the ‘recreation, entertainment and education’ sector may find this a constraint on its growth, unless it can adapt to the changing characteristics of the market. This smaller age cohort of young people will form fewer new households than previous cohorts, so reducing demand for housing, furniture and consumer dura­bles below what it would otherwise have been. In the longer term, a further demographic factor will be the continuing rise in the numbers of people aged over 75, who will place increasingly heavy demands on the medical and care services.

It is not only the demand side which initiates struc­tural change. The reduced supply of young people in the labour market in the early 1990s increased their earnings relative to other workers, which encour­aged firms such as supermarkets to recruit older workers. Employers may also respond by substituting capital for labour and so changing employment patterns, or by raising product prices which would reduce the growth of output and in turn influence employment.

Also on the supply side, technical progress makes possible entirely new goods and services, as well as new processes for producing existing goods and ser­vices. In Chapter 23 we note that microelectronics not only gives us new products, such as word pro­cessors and video games, but also reduces costs of production, whether through the introduction of robotics in manufacturing, or of computerized accounting methods in banking services. Where such ‘process innovation’ raises total factor productivity, unit costs fall. The supply side is therefore itself initi­ating new patterns of demand, output and employ­ment, by creating new products or by reducing the prices of existing products and raising quality.

Changes in resource availability may also initiate structural change, as happened so dramatically with oil in 1973 and again in 1979. When the oil-producing and exporting countries (OPEC) restricted world output, oil-based products rose sharply in price, with direct consequences for substitutes (e.g. coal and gas) and complements (e.g. cars). In response to higher oil prices, not only did the demand for substitutes rise, and for complements fall, but decisions had also to be taken throughout the economy, by both producers and consumers, to use less energy. As a result there was a decline in output and employment in energy­intensive industries, a prime example being steel.

Oil has had further indirect effects on the structure of the UK economy by means of the exchange rate. The development of North Sea oil production enabled the UK to be self-sufficient in oil by 1980, but also bestowed ‘petro-currency’ status on the pound. This meant that the sterling exchange rate was now responsive to changes in oil prices, which between 1979 and 1983 tended to keep the pound higher than would otherwise have been the case. The result was to make UK exports dearer and imports cheaper in the early 1980s, with adverse consequences for out­put and employment in sectors facing international competition, both abroad and at home.

International competition is a potent force for change in the economic structure of the UK. Changing consumer tastes, the creation of new products and changing comparative costs result in the redistribu­tion of economic activity around the world. The demise of the UK motorcycle industry in the face of Japanese competition, for example, was the result of UK manufacturers failing to meet consumer demand for lighter, more reliable, motorcycles which Japan could produce more cheaply. As we see in Chapter 26, for most products the major impact on UK output and employment has come not from Japanese pro­ducers, but from those EU countries which, unlike Japan, have unrestricted access to the UK market. Membership of the EU inevitably meant accepting some restructuring of the UK economy, in accordance with European comparative advantages. This is certainly true for industrial production, with the EU a protected free trade area, though less true for agriculture (see Chapter 27).

Decisions on the location of industrial production are increasingly taken by multinational enterprises. In the UK motor industry, decisions taken by Ford and General Motors during the 1970s and early 1980s to supply more of the European market from other EU plants contributed to the fall in UK car output from

1.3 million in 1977 to 1.1 million in 1987, despite real consumer spending on cars and vehicles more than doubling in that period. However, by 2010, inward investment by companies such as Nissan, Toyota, Honda, BMW and Peugeot-Citroen had helped avoid further falls in UK output, with the UK now the fourth largest automotive manufacturer in Europe, building over 2 million engines and 1 million cars per year.