Macroeconomic and microeconomic concepts

Macro and Micro

Macroeconomic and microeconomic variables in the defense industry

Macroeconomic policy refers to government policy regarding spending and the money supply. When the government spends money during a time of war, or simply to increase the rate of job growth to stimulate the economy out of a recession, the defense industry may stands to benefit from such an attempt to maximize growth, reduce unemployment and to raise GDP, or the Gross Domestic Product. From a microeconomic level, the government will also be more willing to pay a higher price for military goods and services, thus enabling the defense industry to make more money from the same or an increased rate of production per unit. Thus, a growth in government spending can stimulate the defense industry, depending on the area of the economy where the expenditure takes place.

Too much growth, or inflation in regards to the input goods of the industry will harm the industry as a whole, especially if the Federal Reserve bank raises interest rates, making it more difficult to borrow money at an inexpensive rate and to begin new projects in the field of defense research and development, or to expand upon existing factory space. An expanding private, non-military sector economy as a result of a rise in total consumer spending, conversely, that draws defense workers or army recruits into private industry could potentially harm the defense industry even though it is generally positive for the economy.

Government decisions such as going to war obviously affect the industry, but other decisions, such as educational loans that enable students to go to school without the support of ROTC, policies regarding government contractors ability to move between the private and public sectors, and base closures will also have an impact upon industry health and the ability to attract individuals to the industry. Security legislation can open up new venues for some service corporations, in terms of background checks, for example, as occurred after 9/11. The industry is less immediate dependant upon microeconomic decisions of individuals, such as consumer spending on personal goods, although it is worthy to note that many defense plants also manufacture goods used in private industry or make use of goods from private firms, thus the expansion or contraction of prices in this sector can have an effect. Also, like any firm in microeconomic thought, the higher the price received upon particular goods, the greater the willingness to produce more and to hire more workers.