Macroeconomic Gross Domestic Product of UAE

Question: Discuss about theMacroeconomic for Gross Domestic Product of UAE. Answer: UAE Economy Overview: The economy of UAE is considered as the second largest in the Arab World having GDP of $570 billion. UAE has been able to diversify its economy however; it remains to be heavily depended upon oil. It is worth mentioning that petroleum and natural gas continues to be the highest contributor in the economy. More than, 85% of the UAE economy is highly depended upon exportation of oil and overseas sales forms 77% of the UAE state budget (Banerjee Majumdar, 2014). Comparison of UAE GDP from 2006-15: The Gross Domestic Product (GDP) of UAE increased by 3.45% in the year 2015, which is higher than the previous year. In addition to this, the annual GDP growth rate aggregated around 4.69 per cent from 2006 until 2015 (Tradingeconomics.com 2016). The GDP annual growth rate of UAE reached an all time high of 9.80 per cent during 2006 but also recorded a low of -5.20 per cent during 2009. Figure 1: United Arab Emirates GDP Annual Growth Rate (Source Tradingeconomics.com 2016) Service sector forms the largest sector of United Arab Emirates economy with 40 per cent of GDP. Wholesale, retail trade and repairs (12 percent GDP), transport and communication, warehousing (8 percent of GDP), real estate and business services (9 percent of GDP) forms the vital segment. Construction and electricity along with water and gas forms 13 per cent of the output whereas manufacturing contributes 8% of the GDP. Agriculture, cattle ranching and fishing contributes 1 per cent of the remaining GDP (Tradingeconomics.com 2016). UAE continues to ramp up oil production in October and attaining a new height of 2085 million barrels per day (mbph). Abu Dhabi supreme petroleum council approved the national oil corporation with a five-year plan, which advised a further increase in production of 3.5 mbph by combining with economic reforms to boost the degree of efficiency. Analysis of Oil Price Impact on Economy: During the month of April, the purchase index represented a drop of two points for UAE from 54 points in the month of March to 52.8. Anything above the metric reading of 50 represents economic growth however, the expansion was in the areas of manufacturing and service sector but the oil industry was slowing (Al-Shayeb et al., 2016). The emirates production accounts for 3 million b/d of crude oil however, the government revenues is experiencing a continuous fall. The revenues from crude oil accounted for 41% of the GDP during the year 2013, which declined, to 29% of the GDP in the year 2015. It should be also noted that in the environment of low oil price the government spending has been raising from 30 percent of GDP during 2013 to 34 per cent of GDP in the year 2015. As a result, surplus of 10.4% of GDP during 2013 it has turned into the fiscal deficit of estimated 5.2% of the GDP during the year 2016. It is noteworthy to denote that high real GDP growth rate of more than 6 per cent in the last decade has started to decline because of lower oil revenues. A closely watched indicator of Dubai economic health highlighted the first economic contraction of its private sector ever since the recession of 2009, which defined the increasing, effect of low oil prices and global economic jitters in UAE (Elbadawi, Selim, 2016). The primary reason for the decline in the oil price is due to the uncertain international economic expansion, instability in the monetary markets and low oil prices have weigh on sentiments and activity. On the other hand, the tourism and retail trade has been strongly impacted by a strong growth in US dollars as reported in the index tracker, which slipped to 48.9. Identification of Fiscal Policy: The government of UAE implements an active expansionary monetary policy, which is directed towards the growth of the economy and generating, desired economic objectives under stable price. This expansionary fiscal policy also includes reducing employment with sustained economic growth as UAE is aiming to sell large number of bonds so that it can finance various economic strategies. With more amount of money in hand, UAE will move forward with the plan of increasing real GDP with increased government spending on things such as infrastructure and investment in the aviation market (Arrow Kruz, 2013). The strategy aligns with government fiscal policy so that it can attain the economic goals. It should be noted that goals remains the same with more severe and potentially more disastrous implications. Explanation of the Selected Fiscal Policy: The central undertakes an open market operations and purchases securities in an open market. Hence, purchase and sell of securities from public or mainly from the commercial bank may lead to increase in bank reserves or the quantity of money available in the public (Hansen, 2013). With higher amount of reserves, commercial bank can issue large volume of credit amongst the businessperson and investors for undertaking additional investment. Large number of private companys investment will lead the average demand curve to shift upward. Hence, purchase and sell of securities will lead to expansionary effect. Provincially, the central bank may reduce the rate of bank interest or the rate of interest charged by bank on the amount of loan given to commercial bank. With lower amount of bank rate, the commercial bank might be encouraged to have a loan from the central bank and will have the ability to issue more credit at reduced rate of interest to businessperson and investors. This will not lead to cheaper borrowing but may also expand the accessibility of credit or supply of money in the economy (Arrow Kruz, 2013). Thus, expansion of credit or supply of money will ultimately increase the demand for investment, ultimately leading to increase the aggregate output and income. Lastly, the central may also cut down the cash reserve ratio, which should be maintained by the commercial banks. In UAE, this is an efficient method of credit expansion with increased availability of money in the economy by the central bank (Fats Mihov, 2013). It is noteworthy to denote that lower requirements of reserves and huge sum of funds are released to offer loans to businessperson and shareholders. Consequently, credit expansion and investment grows in economy leading to expansionary effect on both output and employment. Explanation of the Selected Fiscal Policy in UAE: Implications: Economic growth: UAE emphasis on buying and selling of bonds as the government believes that acquiring the cash and issuing bonds to the buyers at a certain rate can turnaround the situation by investing the cash into the channel in which it sees fit. Whether it is an infrastructure or aviation the government looks to payback the debt as soon as the investment becomes profitable. The plan faces several contingencies and hindrances on the capability of the UAE government to take complete advantage of putting back the money to work in an efficient way. The results may undoubtedly lead to higher GDP with large amount of active hands on monetary policy (Blanchard Leigh, 2013). Whereas, a hands off monetary policy would require no amounts of debt be issued rather than having sufficient cash to invest before moving forward on any project regardless of the profit deemed available for investment. Low unemployment: Under a hands-off market economy, implementing fiscal policy to attain the desired result of changing the supply of money by dispersing large number of issued government bonds to derive higher output of GDP is poor money management move. In contrary to the idea, even if the government goal of increasing the households overall income the risk of mortgaging could lead to uncertain consequences that are far-reaching and generational. An endless amount of wealth is generated from oil supplies and using hands on theory UAE will able to sell government issued bonds by using cash to build roads and airports (DeLong Summers, 2012). Hence, putting its citizen to work would effectively help in keeping up the unemployment rate at low level and resulting in high GDP. Stable prices: It is a well-known fact that increasing the supply of money ultimately increases the overall price both in short run and in long run. It is unwise to think that monetary policy is lone contributor of inflation as there are several other factors that must be considered but none seems to have direct impact on monetary policy (Rapetti, 2013). The short-term gains from Hands-on-monetary policy would however help in reducing the inflation rate and bringing back price on stable rate. Conclusion: To conclude with the economy of UAE is projected to remain attractive amid the situation of recovering oil prices and growth in the activities of public and private sector enterprises. It is anticipated that the GDP of UAE is subjected to grow by 4 to 5 per cent in the coming years. The current economic assumptions is based on the UAEs existing market of oil exports which revolves around aggregate oil price of $37 in 2016 and is anticipated to be $50 by the end of 2017. 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