Economic Impact of Industries on UAE Economy - Research Paper Example

? THE MICROECONOMIC AND MACROECONOMIC IMPACT OF INDUSTRIES ON THE ECONOMY OF THE UAE Contents The Micro perspective of the individual firm 3 Introduction 3 Costs of Production 5 Demand and Supply Analysis 5 Market Structure 9 The Impact of the industry on the Macro Economy 10 Introduction 10 Industry’s Impact on the UAE’s Gross Domestic Product and Economic Growth 10 Industry’s Impact on the UAE’s inflation rate 12 The Impact of the Macro Economy of the Industry 12 The Impact of the UAE’s Economy on the Industry 12 Industry Response to UAE’s Macroeconomic Conditions 14 Works Cited 15 The Micro perspective of the individual firm Introduction The name of the company is Aldes Middle East (FZE) located in Sharjah, UAE. The company operates in the manufacturing of heating, ventilation and air conditioning accessories and components. The consolidated corporate sales revenue for the company in 2000 was 144 million Euros. The company was able to add 20 million Euros more in the total sales revenue in 2005. The year 2008 witnessed a very welcomed situation for the company as the revenue from sales skyrocketed to 215 million Euros in that year. (Aldes Middle East) The two products offered by the company are accessories of protection from fire and that of distribution of air. For more than three decades the company is involved in providing safer solutions to protection from fire inside all types of buildings. The company offers safe and modernized solutions to fire protection. The company has participated in several committees in Europe to deliver the experiences it has acquired in fire protection. The company offers such products with solutions that will prevent the smoke or the heat to spread to other parts apart from the area under fire. Another service by the company is solution in smoke extraction that will help people to escape from the building under fire. The company is has been able to deliver over one million fire dampers and more than 5 Lakhs dampers that exhaust smoke and guarantee the safety in buildings of all types. The company is a key player in airflow control. It has also started making grilles and diffusers in the year 2000 with the incorporation of Euro Register, a worldwide specialist. Services that provides comfort much higher than the normal level need to be developed to master the control of airflow (Aldes Middle East, air distribution). Some of the keys that will ensure perfect flow of air in home or in office are thermal control, acoustic control and aeraulic control. Within a decade the company offered a proper indoor air quality that includes air renewal and hygiene to the consumers. The company has also shed its mark in providing a correct indoor air quality and solutions that relatively consume low energy. The services include variable air volume solutions and constant regulation of airflow. The company offers reliable, efficient and aesthetic air diffusion solutions. The company is proud to deliver more than 3 lakhs of airflow regulators in a year. The two main competitors of the company are Al-Tahadi Security and Safety and NAFFCO. Costs of Production The three costs of production involves are costs of raw materials, costs of transportation and costs of monitoring. The cost of raw materials is the most important in the production process. For fire extinguishers the raw material includes the cost of apparatus and the cost of fire extinguishing powder. The fire extinguishers are produced in a factory. From the factory, the products are transported to the showrooms or the service delivery centers. The customers arrive at those centers and it is the duty of the company to transport the products where the product is assigned to be delivered. So the transport cost is such type of cost which the company includes in the accounted price of the product. The next important cost is the cost of monitoring. The company recruits people for monitoring whether the equipments are performing correctly or in optimal fashion at the centers. The company is required to pay wages to these people. The cost of raw materials is a fixed cost as the company cannot avoid such kind of costs. In order to continue the process of production it is necessary to carry out these costs. The cost of transportation is also a fixed cost. It is necessary to transport the products to the showrooms or in the delivery centers otherwise the whole aim behind the production process will remain unsuccessful. So the company cannot avoid such kind of costs. The last cost i.e. the cost of monitoring is a variable cost as the company can avoid this cost. The company may think the products are efficient enough to function properly without monitoring. It may take the risk of not recruiting anyone for the monitoring process and can ignore or avoid this cost. Demand and Supply Analysis The product is a normal good as if the income of the consumers increases then the demand for the product increases. Again if the income of the consumers decreases then the demand for the product will decrease. Suppose the consumers were consuming ‘x’ quantity of the product when the income was ‘y’ amount. Now suppose due to some reason the income of the consumers rises to ‘y+1’ amount. As a result the demand for the product will rise to ‘x+2’ units. Thus a rise in income of the consumers will bring increase demand for the products of the company. Again suppose the income of the consumers fall to ‘y-1’ amount from ‘y’ amount. As a result the demand for the product will decrease to ‘x-2’ units (Oxford University Press). Thus a fall in income of the consumers will bring reduced demand for the products of the company. Al-Tahadi fire and security is the chosen competitor. Suppose the competitor decides to increase the price of the services it offers. On the other hand, the chosen company decides to keep the prices of its services at the same level. In that case more consumers will be attracted towards the product of the company whose prices have remained stable. The consumer base of the chosen company will expand. The company will be able to attract a part of the consumers who belonged to the competitor. Therefore the demand for the product of the present company will increase and the company will be able to generate more revenue if it is able to make optimal utilization of the situation. The chosen company or its competitor can launch upon a new and modernized technology that will increase the efficiency of the product (Hubbard, Patrick, Glenn, 121). The newly developed technology can also reduce the production cost. The company will divert the gains from reduction in cost of production by reducing the price of its product which will act as an incentive to increase the consumers’ base. But if the modernized technology acts to increase the price in spite making the product more efficient, the company will suffer from the fear of losing some of its consumers. The age or sex of the consumer will have no impact in the demand for the products. Fire protecting instruments and airflow distribution equipments are the necessities for all types of consumers irrespective of age/sex. But increase in the number of consumers will increase the demand. The company will increase the supply of the products to match the excess demand. The company will also have the opportunity to revise the price of the products it sells. Suppose more companies are interested to enter in this sector and produce the same products as our chosen company. In that case the existing consumer base will get redistributed among the competitors. Each competitor will forecast to lose a part of the consumers. There will be excess supply in the market and price will possibly go down. The cost of raw materials can be regarded as the cost of production. If the cost of raw materials rises the company will have to incur extra costs in the production process. As a result it will have to increase the price of the product in order to cover up the extra cost. The consumers will feel the heat of the increased price and the demand will be affected. Price Elasticity of Demand The price elasticity of demand measures the demand change due to a change in price of the product. The percentage adjustment in quantity demanded by percentage adjustment in price gives the coefficient of the elasticity of demand. Economists usually are not concerned about the sign of the price elasticity. It is the coefficient that is of concern sine price and quantity demanded generally tends to move in opposite directions. If the value of the price elasticity of demand is zero, then it implies that the demand for the product is inelastic perfectly. This implies that there will not be any changes in demand conditions due to change in price. It will generate a vertical shaped demand curve. If the value of the price elasticity of demand is between zero and one, then the demand for the product will be inelastic. Producers will know that a demand change will be proportionally smaller than the change in price of the product. If the value of the price elasticity of demand is unity, it implies that the percentage change in demand conditions for a product will be exactly same as the percentage change in price of the same product. The demand is said to be unit elastic. If the value of the price elasticity of demand is greater than one, then the demand is said to be elastic. This means that a percentage change in price will bring more than proportionate change in the demand for the same product. The determinants of the price elasticity of demand is number of close substitutes available for the product, the transaction costs involved in switching between products, the necessity conditions of demanding a particular product, the percentage of income allocated by the consumer on that product and period of time allowed after the change in price. The value of the price elasticity for the chosen product will be between zero and one. Even if there is change in price of the product, the consumers cannot ignore the probability of fire. So they will have to take the safety measures. The demand will fall to some extent, but the degree of the fall will be much lesser than the increase in price. (As Market and Market Systems, price elasticity of demand) The income elasticity is one of the elasticity concepts that are in line with the demand for fire extinguishers. The income elasticity is defined as the demand change due to change in income of the consumers taking all other conditions to remain constant. Positive income elasticity is said to exist for normal goods as the demand rises with the rise in income of the consumer. Since the products selected are normal goods in this case, the income elasticity will be positive. Market Structure The market structure where the selected company operates is monopolistic competition. Monopolistic competition defines a market structure where there are many competitors but all produce differentiated products so that none of the products are perfect substitutes. In this type of market, the participating firms behave like a monopolist in the short run. Following are the characteristics of this type of market structure. Many producers and consumers constitute the market structure but none has the ability to control the prevailing price of the market. Consumers believe that there are non price differences between the products of the competitors. There are some barriers to entry and producers have some extent of control over the price. The two barriers to entry in this type of market are advertising and capital. Advertisement creates brand royalty. Advertisement has the power to diversify the consumers in demanding the product of a certain company. For entry into this market structure capital can act as a barrier because to start up a new business there is requirement for some amount of capital. Companies have to take the risk in investing a lot of capital without knowing the returns. A certain level of uncertainty accrues to such decision. The business is a price taker. The Impact of the industry on the Macro Economy Introduction The industry where the chosen company operates is manufacturing sector. The manufacturing sector contributed as much as 13% in the GDP of Dubai. Since 2009, the manufacturing sector has been the largest non oil contributor to the GDP of Dubai. The sector is the fourth largest contributor to GDP. Almost 8% of the total work force is employed in this sector. The sector has experienced an average growth of 8% between the years of 2007 and 2010. However the growth rate was low in the year 2009 but in 2011 the sector grew at a rate of 11% (6th TMT Finance and investment Middle East Conference, Dubai, 2012). Industry’s Impact on the UAE’s Gross Domestic Product and Economic Growth Gross Domestic Product is defined as the value of the goods and services produced by a nation within the geographical boundaries over a period of time. Per capita GDP is often taken as the indicator of the standard of living of a particular country. But it is not the measure of personal income. The summation of consumption, investment, government expenditure and net trade balance gives the Gross domestic Product (World Bank). The increase in the production of goods and services produced by a nation or economy over a certain period of time is regarded as economic growth. The economic growth is also computed as the percentage growth in real GDP. In order to nullify the effects of inflation on the value of goods and services growth is usually calculated in real terms. Economics define economic growth as the growth of potential output caused by expansion of aggregate demand (International Economics). The economy of UAE ranks 38th in the world apart from ranking third in the Middle East countries and second in the CCASG. Although various estimates exist that deals with the growth rate of the economy, all the available and reliable statistics estimate that the economy of UAE is one of the fastest growing economies in the World. The manufacturing sector contributed a total of 38.72 billion dirhams in GDP. The whole sale, repair and retail industries contributed 89 billion dirhams while industries like real estate and business activities contributed 40.29 billion dirhams (Department of Economic Development, Government of Dubai). The estimated annual industrial production is approximately 200 billion dirhams for the current year. It is expected that the economy of Dubai will flourish in 2012. The manufacturing sector of the emirates is supposed to be one of the key indicators. This sector has gained massive importance in the economy over the few years. The importance of these industries skyrocketed because industries such as construction and real estate have failed to fulfill the expectations. The sector is expected to grow at more than 6% in the year 2012 while the GDP is anticipated to grow at about 4% (Economic Statistics). The growth of the manufacturing sector will open up job opportunities. The work force can shift their concentration from the oil industries. Manufacturing sector will provide them the opportunity to acquire the required skills. The skilled workers in the alter period can try their luck in other industries. The employment opportunities will improve the standard of living of the society. This is a positive effect on the society. It will be possible to bring growth in the economy through the hands of the manufacturing sector. But the sector also has an impact on the society. Almost all manufacturing industries can pollute the society. Real estate and construction firms constitute a lump sum part of the sector. The dust raised in a cement factory has harmful effects on the society. It is quite impossible to breathe in the adjoining areas of a cement factory. In the phase of global warming, these types of industries not only shed its effects on the environment of UAE but the whole globe is affected. Some of the industries operating in the manufacturing sector involve themselves in charity. They help to pull out the poor from the vicious circle of poverty and as a result the whole economy is benefitted. It is also possible to attract foreign revenue into the economy because of the manufacturing sector. The creation of jobs will increase the welfare of the nation. Industry’s Impact on the UAE’s inflation rate The changes of fluctuations in the level of price for consumer goods and services are measured by consumer’s price index. It is constructed using the statistical measure of a sample of representative items. The prices of the selected items are collected periodically. The prices in an economy experiencing the effects of inflation are generally high. Therefore the prices of the products selected will also be high and so the consumers will move away from demanding the product and the demand of the product will fall. The Impact of the Macro Economy of the Industry The Impact of the UAE’s Economy on the Industry In the last year the GDP of UAE expanded by about 3.3%. In the last decade the country’s average quarterly growth rate has reaches as high as 11.9 in the month of December, 2003 and also reached a record low of -1.60% in the month of December, 2009. The economy is open and is characterized by annual trade surplus. Efforts towards diversification have been taken and it has reduced the portion of GDP to 25% based on oil and gas (Department of Economic Development, Government of Dubai) (United Arab Emirates Annual Growth Rate) Economic growth means increased income in the hands of the consumers. The companies can diversify the increased income to their favor by supplying different types of products in the market. The consumers will have a more widened choice basket and demand for the products of the companies is bound to take the steep path upwards. Consumers try to anticipate the future prices in a situation of inflation. If they anticipate that future prices are likely to go down, then they will hold their demand for the time. This will have the cascading effect on the demand for the good. Again if they anticipate that future prices are likely to be higher than the present level, then they will try to satisfy their future demand presently. The demand for the product will tend to rise. In the situation of inflation, the costs of production will rise. The companies will pass on the rise in costs to the consumers. Therefore, the consumers will have to bear the rise in production costs by paying higher prices for the products. The price of raw materials is a major cost of production. If the prices of raw materials rise, then the cost of production will rise and so the companies will have to increase the price level of the products or search for alternative ways to cope up with the situation of rising prices. Industry Response to UAE’s Macroeconomic Conditions It is forecasted that the growth rate of UAE will take the steep rising path in recent years. As a result the demand in the industry is likely to rise. The companies operating in the industry will try to match the increased demand. Therefore they need to increase the supply of their products. This means they will look out for providing new opportunities to the people in terms of providing jobs. So the welfare of the society will improve. They will also like to expand their business. So they will try to attract foreign investments. Therefore, the economic growth of the nation will take place. The overall level of well being will improve (Ghanem, 261). Works Cited Aldes Middle East, Group. Key Figures. 2012. http://www.aldes.ae/key-figures Aldes Middle East, Air distribution. 2012. http://www.aldes.ae/air-distribution 6th TMT Finance and investment Middle East Conference, Dubai, 2012. http://www.bi-me.com/main.php?c=3&cg=2&t=1&id=53681 Department of Economic Development, Government of Dubai. Economic Research. http://www.dubaided.gov.ae/english/Pages/default.aspx Ghanem, S. Industrialization in UAE. 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