Impact of Macroeconomics on Consumption, Savings, Investments and Business Cycles - Essay Example

Macroeconomics Name Institution Date Table of Contents Table of Contents 2 Impact of Macroeconomics on consumption, savings, investments and business cycles in UAE 3 Introduction 3 Concepts, objectives, and instruments of Macroeconomics relevant to United Arab Emirates 3 Aggregate demand/supply, consumption, savings, investments and business cycles related to United Arab Emirates 7 References 12 Impact of Macroeconomics on consumption, savings, investments and business cycles in UAE Introduction United Arab Emirates has emerged as one of the fastest growing economies in the Gulf region. The economy of UAE is highly depended on oil although other sectors like air transport are expanding rapidly. Like in many other economies in the world, savings is highly influenced by the interest rate and the amount of disposable income. Macroeconomic concepts in the UAE are not very different from other countries which are rich in oil reserves. The price of oil in on the global market affects the economic performance in UAE. United Arab Emirates has registered a positive growth in its GDP. Labor market is highly elastic owing to availability of international workforce. As compared to its neighbors UAE economic is doing well and tending towards diversification to other sectors. Concepts, objectives, and instruments of Macroeconomics relevant to United Arab Emirates United Arab Emirates is a federation of 7 emirates which are located in the southeast part of the Arabian Peninsula in the Persian Gulf. With a geographical area of about thirty thousand square miles and a population of 4.6 million people, UAE seven states comprise of Abu Dhabi, Ajman, Fujairah, Dubai, Sharjah, Umm al-Quwain, and Ras al-Khaimah. The nation borders Saudi Arabia and Oman and share its sea borders with Iraq, Iran, Kuwait, Qatar, and Bahrain. UAE has a small population and small land mass as compared to its neighbors. The GDP of UAE ranks second after Saudi Arabia in the CCASG (Arnold, 2010). There several varying estimates concerning the actual rate of UAE growth, nevertheless all statics that are available indicate that UAE is one of the fastest growing economies in the world. Nominal GDP rose by thirty five percent in the year 2006 to about 175 as compared to $130 billion in the year 2005. The economy of United Arab Emirates is highly influenced by the production of oil. United Arab Emirates is one of the members of OPEC organization. Oil was discovered in Abu Dhabi in the early 1960s; this move changed dramatically the economy of United Arab Emirates. The unprecedented growth of UAE in the early 1970s was propelled by the discovery and subsequent exploitation of oil offshore and onshore. Presently UAE holds about 97.8 billion barrels of oil. This makes UAE contribute 7 percent of oil reserves globally (Barro, 2008). The production of oil in UAE is anticipated to last for about 93 years with an average daily production of 2.9 million barrel. Organization of Petroleum Exporting Countries (OPEC) is responsible for about 40% of the global oil supply. This gives OPEC the opportunity of influencing oil prices all over the world. This instance happens when cartels collude to control balance of demand and supply and production in the global market. Countries that are non-OPEC members are responsible for the largest part of supply. Oil is produced in many places in the world and many regions have been expanding their production of oil over the decades. Some of these produce include Norway, Europe, and Russia. Nominal imports (MN) in UAE are determined using nominal GDP (GDPN), USA’s trade weighted exchange and gross fiscal deficit. The UAE currency is pegged on the US dollar. Any adjustments in the dollar will have effect on the UAE dirham. Depreciation in the currency is depicted in the growth of the index. Like other countries in the Gulf region, the economy of UAE is heavily dependent on the oil and gas industry. Dubai, which is one of the states in UAE, is approximated to have five to ten years of petrochemical reserves. The oil and gas sector contribute to 6 percent of its GDP. Contrarily to other economies in the region, the UAE is comparatively known liberal economic and social policies; and largely pro-Liberalization stance and pro-Western stance. Dubai’s and UAE’s economic performance favorably compares with that of neighboring nations, but more so with economies; especially with the East Asian city states like Singapore and Hong Kong. The labor force has grown tremendously up to 90 percent (Krugman & Wells, 2009). Government expenditure on salaries and wages demonstrate the main role of the federal government towards provision of employment to national of UAE, especially from the northern emirates which is poor. It also shows the efforts of hiring health workers and teachers to cope with the surge in the population. The government engages in many activities for welfare reason. For countries that rich in oil, non-oil fiscal balance is a better measure of existing fiscal trends as opposed to traditional overall fiscal because it abstracts from the volatility of oil revenues and prices. After a long time of relatively low oil prices, in the past decade, the economy in the world has come to recognize the truth that the era of oil which is cheap is over. This affects many industries in the United Kingdom economy and possesses indirect and direct effects on consumers. For those factories that utilize oil as a key input in heir process of production, rising oil prices becomes supply side shocks (Sancho, 2009). This leads to higher input as costs in variable production costs. The more any industry depends on oil, the larger the impact when oil prices rises on its profitability and costs, and subsequently the larger the fall in its production will be released in the long run. Comparison with Qatar As compared to neighboring economies like Saudi Qatar, United Arab Emirates has grown tremendously and its economy is not depended on oil production alone. There is investment in air transport and other industry that ensures development of an economy that is sustainable. The neighboring economies are looking for further markets in UAE due to the vibrant economy. The economy is quite stable as compared to neighbors and political risks are less experienced. Qatar economy is more dependent on oil industry as compared to that of UAE. Aggregate demand/supply, consumption, savings, investments and business cycles related to United Arab Emirates The inside mechanism of long run business cycles cannot be satisfactorily drawn from market supply-demand fluctuation resulting from extreme self confidence hence resulting into overproduction or through customers with expectations that are misguided. The market is in a position of compensating the kind of turbulence within a short time, which is usually less than five years. Investments in formation of capital are restricted to savings by both business and households in prior periods. Total investment cannot go beyond total savings with a part that is immobilized by saving account, in bonds issued by the government. Any injection of money which is not followed by a proportional growth in services and goods supply tilts the economy to move away from the equilibrium (Castellacci, 2008). There exists a lag between mounting government spending and the effects of the economy in terms of surging supply. During this time, an economy has to operate in a regime that is stressed demonstrated by increased money supply and inflation. The resulting balance of negative and positive consequences of this type of regulation seems to be unprecedented for any particular case. Source: http://ingrimayne.com/econ/optional/ISLM/Aggregate.html If the government, using the Central bank comes up with extra investment capital by turning on machines for printing and issuing money that is unsecured leads to growing inflation. These changes blows up investment bubbles and result into the economy being driven to an inevitable slow down. Growth in aggregate supply is limited by quality and quantity of availability of production factors (O'Sullivan, A. & Sheffrin, 2003). Aggregate demand has to change within the corridor, comprising of the aggregate power to purchase or the amount of money which is available for purchasing. Source: http://www.bized.co.uk/educators/16-19/economics/adas/activity/adas.htm Keynesian view of saving and investment At full employment, investment and savings are equal. When savings goes beyond or above investment there will be a recession. UAE economy has a perfectly elastic labor supply; consequently the job market is not affected by any market tightness resulting from expansion. The variations from non tradable market and in partner inflation have huge impact on the inflation locally. Nevertheless, because labor supply in the UAE and other GCC economies is considered to be very elastic, it is not important to look at the correlation between the rate of inflation and unemployment rate (Barnett, 2004). While aggregate demand goes up, the country gets its need of labor force from the global supply of labor. A potential source of inflation is the surge in demand locally for non tradable goods, particularly capital goods that are non tradable like infrastructure, commercial buildings, and residential dwelling. Business cycles in United Arab Emirates are highly affected by the prices of oil on the international level. The currency of UAE being pegged on the dollar makes it a big challenge for some external shocks on the economy to be avoided (Jones, 2002). A low priced dollar is an advantage to the economy of UAE. In the long run consumption is guided by production and the amount of supply in the market. UAE is a fast growing economy in the Gulf region and the level of investment has attracted foreign labor supply. Development in infrastructure has led growth of business as different town get interconnected. The speed of development is determined by many factors such as a sustainable infrastructure and availability of skilled and trained workforce. Conclusion United Arab Emirates is a good example of emerging economies. For a long time UAE has posted a positive growth of its GDP. Its per capita income has also been impressive. The country’s currency being pegged to the US dollar opens up the economy to external shocks. The world oil prices affect the manner in which trade is conducted in the UAE. Inflation can be intervened through the government fiscal policy. Govern excessive injection of money in the economy can lead to inflation. The UAE economy is doing well in the Gulf region. References Jones, C.I. (2002). Introduction to economic growth. 2nd ed. New York: Norton. Castellacci, F. (2008). Technological paradigms, regimes and trajectories: manufacturing and service industries in a new taxonomy of sectoral patterns of innovation. Research policy, 37: 978-994. Barnett, W. (2004). Dimension and economics: some problems. The quarterly journal of Austrian economics. 7 (1); 95-104. Sancho, F. (2009). Calibration of CES functions for real-world multisectoral modeling. Economic Systems research, 21 (1); 45-58. O'Sullivan, A. & Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey. Krugman, P.R. & Wells, R. (2009). Macroeconomics. London: Worth Publishers. Barro, R.J. (2008). Macroeconomics: a modern approach. New York: Cengage Learning. Arnold, R.A. (2010). Macroeconomics. New Jersey: Cengage Learning. Read More