PROJECT TITLE: ECONOMICS FOR MANAGERS
Table of Contents
1. Main Products & General Characteristics of the Firm 2
2. Analysis of the firm’s supply and demand: 7
a) Change in consumers’ income: 8
b) Change in Prices of competing products/services: 10
c) Change in the number of consumers: 12
d) Change in technology: 13
e) Change in the number of firms 14
f) Changes in costs of production: 15
3. Analysis of the Price Elasticity of Demand for one of the products. 17
Law of supply and demand 19
Main Products & General Characteristics of the Firm
ChicKing is one the fastest growing fast food chain in UAE. It has expanded from having a single unit restaurant in 2000 to over 75 outlets across the globe. There are 12 outlets of ChicKing in UAE itself. It has been serving authentic and one of the best chicken that is available in the market. It was first established in UAE under the franchisee obtained by the Banquet Foods International. It is very well known for using the choicest herbs, spices and flavors in its chicken and has a unique recipe that it has retained as a secret in the food market. It has developed the tagline of “Real Recipe, Real Taste, Real Fried Chicken” (CHICKING.COM, 2016). It is also known for the different varieties of burgers, rolls and wraps that it provides that has different ingredients which are very well enjoyed by its customers.
The launching of the ChicKing food chain in UAE, has been referred to as one of the most important international achievement by the fast food chain. It defines the various international strategies that are adopted in the fulfillment of the global marketing objectives across the food market. The demand of the people has been fulfilled through increasing the supply and specialization of the products that are made by the ChicKing restaurant. In this case, there are discounts provided by the ChicKing restaurant during the initial discount season to promote its most extensively eaten food items like the Royal crunchy, crunchy supreme apart from the wide range of pancakes that are globally popular. There are few items that are not sold in large quantities and Mexican grill wrap provided by it is one of them. The two items that were selected includes the Crunchy supreme and Mexican grill wrap mentioned two items in the menu were made available at about 8% discount that includes providing the crunchy supreme at AED 12 after providing a discount of 8% on its actual price of AED 13. The price of the Mexican grill wrap has been kept about AED 9 which was initially about AED 10 without the discounts. Hence, the sales for both the products has been obtained in the following table:
Year: 2015 – 2016
Discount season (August and September) Regular season (February and March 2016) Comparison
Product Name Discount price Quantity sold (D) Sales Revenue Regular price Quantity sold (D) Sales Revenue Change in selling price (in AED) change in total sales (in AED) gain or loss in %
Crunchy supreme 12 2,500.00 30,000.00 13 2,200.00 28,600.00 1 1,400.00 -4.6%
Mexican grill wrap 9 2,100.00 18,900.00 10 1700.00 17,000.00 1 1900.00 10.05%
Total sales 48,900.00 45,600.00 -3,400.00
Average sales daily 815.00 810. -463.33 -15.1%
The above table shows the sales comparison for both discount season and regular season. The data taken is for 60 days for both the season. The Discount season is for August and September 2015 of initial opening months. The regular season data is for February and March of 2016. There is increase in the price of both the products by AED 1 in regular reason. There is decrease in the sales of both the products due to increase in their prices, but there is different effect on the profits that has obtained from both the products.
The Crunchy supreme sales units were 2500 during the discounted season and it decreased to 2200 for the regular season. The price that was increased by AED 1 resulted in the decreasing of sales across the UAE market. For the change in total sales of the Mexican grill wrap, the change in the sales generated even though the number of quantities sold being reduced from 2100 to 1700, there was a major reduction of about AED 1900 in its sales during the two seasons. It has been shown in the table that there was a loss of about 4.6 % in the sales of the crunchy supreme in ChicKing whereas there was a loss of about 10.05% in the sales of the Mexican grill wrap.
The above graph shows the sales revenue comparison for both the products for both the seasons. It can be seen that the difference between the sales of the two food items is not very much different from the values that were obtained during the discount season. During the regular season, despite of the increase in the price of the product and decrease in demand of the products, there was a marginal decrease in the total sales of the two items. For the crunchy supreme, the change in the total revenue was about AED 1400, whereas for that of the Mexican grill wrap constituted to be as AED 1900.
The above graph shows the price comparisons for both the products during both the seasons. The price is increase by AED 1 for the Crunchy supreme and the same for the Mexican grill wrap, respectively in regular season as compared to the discount season. The discounted price of Crunchy Supreme was AED 12 and of the Mexican grill wrap is AED 9. The price increased to AED 13 and AED 10 respectively for both the products during the regular season in the market.
The graph describes sales comparison and changes in sales. There is more change in total sales revenue of Mexican grill wrap while there is less change in sales revenue of Crunchy Supreme. The overall impact on sales revenue is AED -3400.00 in regular season as compared to the discount season.
The restaurant is going to increase the production of Crunchy Supreme considering the high demand of the product in the market obtained through the higher number of crunchy supreme sold as compared to the Mexican grill wrap. To increase the production of Crunchy Supreme, it reduces the production of other products and affects the revenue. The restaurant has increase the production of Crunchy Supreme by 10 units daily and it has to compromise the production of Mexican grill wrap by 8 units per day. If we compare these, there is changes in the revenue as follows.
Regular season (Feb and March 2016) New production
Product Name Regular price Quantity sold (D) Sales Revenue Regular price Quantity sold (D) Sales Revenue change in total sales (in AED) gain or loss in %
Crunchy Supreme 13 2,200.00 28,600.00 13 2500.00 32,500.00 3,900.00 13.63%
Mexican grill wrap 10 1,700.00 17,000.00 10 1,500.00 15,000.00 -2000.00 -11.76%
Total sales 45,600.00 47,500.00 -1900.00
Average sales 15,333.33 14,533.33 -800.00 1.87%
There is increase in the revenue of Crunchy Supreme by 3900 AED but there is a decrease in the sales of Mexican grill wrap by 2000 AED. When the firm increases the production of Crunchy Supreme by utilizing the available resources, it reduces the production of other products like Mexican grill wrap. The restaurant has limited resources and it has to allocate the resources for production of different products. The increase in production of Crunchy Supreme reduces the production of Mexican grill wrap. The decrease in production of Mexican grill wrap reduces the revenue for this products. The increase in the revenue for Crunchy Supreme is of AED 3900 while the sale revenue for Mexican grill wrap is reduced by AED 2000. The overall position shows increase in total revenue of the restaurant. The opportunity cost for increasing the Crunchy Supreme is lower than the revenue obtained. It is advisable to go for this option.
The scarcity of any resources affects the business operations and requires proper management of scarce resource for getting maximum benefit from it. The restaurant faces the scarcity of quality raw materials as it emphasizes on the high quality of product through providing Halal chicken it has an adverse effect on the business revenue. The restaurant can produce more units of one products then it has to compromise the production of another product. It is the same as we have discussed about the increase in production of Crunchy Supreme. There are many issues that are faced by them in order to maintain their status of providing Halal compliant products.
Analysis of the firm’s supply and demand:
The researcher analyze the impact of demand and supply for Crunchy Supreme. There is high demand of this product in the market and the restaurant is able to manage the supply quantity in most of the times. Sometime there is more supply but less demand of the product. The below graph shows the impact in equilibrium prices due to change in demand.
The above graph shows there is change in the demand of product from Q to Q2 and it has also impact on equilibrium points and it moves from E to E2. The change in demand has impact on the equilibrium point. There are different factors which affects the demand and supply of the products. The different factors have different impacts on price and equilibrium. The following are different situations and their impact.
Change in consumers’ income:
There is a direct relation between the income of the consumers and the demands of the products. When the product is a huge success in the market, there would be a great influence in the demand of the products and the income of the products. The Crunchy Supreme is considered as normal product and it shows increase in the demand of the product sue to increase in consumer income. In Dubai, there is a tremendous increase in the income of consumers in last decade as Dubai is one of the fastest growing economy of the world. The increase in the income of consumers increases the demand of Crunchy Supreme and it supports the statement that the product is a normal product and have direct relation with the increase in income and demand.
A simple graph that shows the relationship between the changes in the income and the demand of the product has been shown below:
Thus, it can be stated that any kind of change in the consumer’s income would directly affect the demand of the Crunchy Supreme developed for increasing the market share of the company. It involves developing a considerable amount of research to understand the income demographics of the people that are going to be the potential customers for the company’s product. The effect of the change in income on the demand of the product can be obtained through an elasticity curve that has been developed below:
The above graph shows the income effect on the demand of the product. The increase in income increases the demand for superior or normal products while decrease the demand for inferior products. The increase in income increases the purchasing power of consumers and motivates them to increase the demand of normal products. In our case, increase in income from Q_1 to Q_2 increase the demand from D_1 to D_2 though there is increase in the price of the product. This shows positive income effect and concludes that our products are normal not inferior (Robbins, 1997).
Change in Prices of competing products/services:
ChicKing is selling Crunchy Supreme at the price of AED 12 per piece. They have increased the price of the product to AED 13 from February onwards. ChicKing was selling the crunchy Supreme at the rate of AED 13 and was able to sale 1100 units per month. When there is change in the price of competitor, there is increase in the sales to 1250 units for the month of September 2015. The simple graph given below shows the impact of change in competitor’s price (Tellis, 1988).
The below graph shows the relation between increase in competitor’s price and its impact on our products. The increase in competitor products makes our products relatively cheaper and increases the demand of our products. In the graph, the increase in competitor’s price from P1 to P2 increases the demand for our products from Q1 to Q2. When the prices of the competitors increase, the customers tend to move to our product and there would be shifting of the brand loyalty of the customers.
This will generate positive results for the company through increasing the demand of the company’s products across the international market.
Change in the number of consumers:
In this case, the major customers belong to the age group of 12-35 years. The average family income of the consumers are AED 1, 00,000 to AED 2, 00,000 per year. If there will be change in the consumer category, it will affect the sales. The new category of age group above 35 years, there will be reduction in total sales.
The above diagram shows the impact of change in c ustomer category nd its impact on demand. The target group is 12-35 years age group but when we target the new age group of above 35 years, it reduces the total demand from Q_1 to Q_2 and shifs the demand curve from D_1 to〖 D〗_2. Thus, it can be seen that for different age-groups, the effect of the chainge in number of consumers is different and it depends on the interest and consumer behavior of the potential customers that are belonging to different age-groups.
Change in technology:
The new technology helps in generating more business. In case of restaurant, online booking, order booking software, billing software helps in increasing the performance of the staff and helps in serving more number of customers. There are many forms of technological support also reduces the consumer time and increase the satisfaction level. There is positive impact on sales and demand. Technology tends to be one of the most important factor in determining the quality and service as well as the comfort that the product provides to the consumers. It involves developing innovative technologies that would be user friendly and provide the customers with an ultimate user experience across the market. Technological implications in the company has direct relation with the demand. Hence, it can be stated that it increases with the increase in demand. Also, there is hardly any relation between the technology and prices of the product and in fact in some instances, use of technology has helped in reducing the prices.
The technological changes affect the total demand of the products. The above graph shows the impact of technological changes on the demand. The change in technology, increases the demand from Q_1 to Q_2. Though there is no change in the price of the product. It also change the equilibrium point and shift it to new point at right hand side.
Change in the number of firms
The increase in number of competitors affects the sales adversely. The more competition provides more options to the customers and switching cost in case of restaurant is zero. The customer shifts to competitor products very frequently. The higher the competition, lower will be the sales.
When there are new competitors entering the market, there is a considerable amount of increase in the shifting of the customers to other food chains and this adversely affects the sales of the ChicKing products.
Changes in costs of production:
The increase in production cost have two effects either increase in sales price or reduce the profit. We consider the example of increase in the raw material price for Crunchy Supreme and it reduces the profit of the firm. The simple graph that shows the relationship between the changes in costs of production and the supply of the product.
When the firm increases the sale price to maintain the increase cost of production, there will be decrease in sales (Tellis, 1988).
Analysis of the Price Elasticity of Demand for one of the products.
The researcher choose the Crunchy Supreme for understanding the price elasticity of demand.
Discount season Regular season
Product Name Discount price Quantity sold (D) Regular price Quantity sold (D)
Crunchy Supreme 12 2500 13 2200.00
There are different factors which affects the demand of the products like income, price of competitive products, consumer tastes and preferences, number of buyers, future expectation etc. In our restaurant business, demand is more sensitive to price as compared to other determinant of demand. The demand is sensitive with the changes in price and it is price elastic. The increase in the price reduces the sales and it is concluded that the demand is price inelastic. The determinants of price elasticity of demand are the demand as well as the prices that are continuously changing while observing different trends in the global or local market. It is very much depended on the product and the popularity that it develops in the market. The change in demand and the change in price are the two significant characteristics that are affecting the development of the price elasticity of demand for the products that are developed in a company. In this case, the Crunchy Supreme is the product for which the production has been increased. The demand for the product is developed through establishing the data regarding the increase in price and the sales that the product, that is, the Crunchy Supreme has in the market. The logical reasoning can be derived from the following formula:
Price Elasticity of Demand = (Percentage change in demand quantity)/(Percentage change in prices.)
The different values of Price Elasticity of Demand and its classification has been shown:
When the values of price elasticity is between 0 to 1, the plastic elastic demand is inelastic.
When the values of price elasticity is greater than one, the plastic elastic demand is elastic.
When the values of price elasticity is one, the plastic elastic demand is unit elastic.
The mid-point formula for calculating price elasticity of demand is as follows:
Q_1 represents the initial quantity of demand before increasing the production
Q_2 represents the final quantity of demand after increasing the production
P_1 represents the initial price before increasing the production
P_2 represents the final price after increasing the production
The main purpose of the mid-point elasticity formula is to get the price elasticity of demand as well as price elasticity of supply and also income elasticity of demand.
The table shows the price elasticity of demand calculations.
Discount season Regular season
Product Name Discount price Quantity sold (D) Regular price Quantity sold (D) Q2-Q1 (Q2+Q1)/2 P2-P1 (P2+P1)/2 Elasticity of demand
Crunchy supreme 12 2500 13 2200 -300.00 1350 1 12.5 -0.28181818 0.28181818 -2.77
The calculation shows the price elasticity of -2.77 which indicates inelastic demand. The result in “a” section also suggests the same result of relatively elastic demand. There is inverse relation in price and demand and it is the reason for same result in both the theoretical and calculations.
Law of supply and demand
Supply and demand law are dependent on the market prices for the development of their relationship. The law of supply can be termed as the increase in the supply of the good with the increase in the market prices. On the other hand, the law of demand states that there is a decrease in the demand of the product when the market prices increase.
Chart displaying Law of supply:
Chart displaying Law of Demand:
CHICKING.COM. (2016). WELCOME TO CHICKING. Retrieved from http://www.chicking.com.kw: http://www.chicking.com.kw/index.html
Robbins, L. (1997). On the elasticity of demand for income in terms of effort. In Economic Science and Political Economy , 79-84.
Tellis, G. J. (1988). The price elasticity of selective demand: A meta-analysis of econometric models of sales. . Journal of marketing research, , 331-341.
John Maynard Keynes: His theories and concepts on economics
Economy can be defined as a state of a nation with respect to the production as well as consumption of goods and services along with the supply of money.
Elements like individuals, businesses, companies or organizations and government. Initially, economy was believed to be comprising of natural resources available, labour, finance and capital.
These belief included neglecting the technological factors as well as the innovation elements.
Inflation can be defined as the general and substantial increase in the price of goods and services over a particular period of time in a given economy.
Inflation has positive as well as negative effects and influence on the economy.
In an economy, it creates uncertainty about the availability of the product or service pertaining to the increased price and demand.
Concepts of modern economists
Rational expectations is a concept of economics in which is observed that the prediction of the future value of the various variables while developing a new economic policy needs to be expected on the basis of current trend and situation of the market.
These framework expectations and estimation is developed more on an econometric model rather than on a statistical model (Buchholz, 1989).
It states that blindly following an old policy, principles or behaviour while developing a new frame of policies leads to poor structuring of the economy.
Robert Lucas Jr, was the first one to propose and use this concept of rational expectations.
Remember that rational expectations approach continuously updates their model of the economy.
This implication of rational expectations and the related model is known as the Lucas Critique.
John Maynard Keynes is considered as one of the founders of the modern macroeconomics who have made immense contribution in the world of economics.
He provided the concept of considering the overall demand instead of the earlier neoclassical economics to effectively carry and predict an economic activity.
Neoclassical economics had the concept in which the markets would provide complete employment to the workers whose wage demands had flexibility (Heilbroner, 1999).
Ideal economy according to Keynes.
Keynesian believes that overall demand is influenced by a host of economic decisions—both public and private—and sometimes behaves unevenly. The public decisions include, most prominently, those on monetary and government (i.e., spending and tax) policies.
According to Keynesian theory, changes in overall demand, whether anticipated or unanticipated, have their greatest short-run effect on real output and employment, not on prices. This idea is portrayed, for example, in Philips curve that show inflation rising only slowly when UNEMPLOYMENT falls. Keynesians believe that what is true about the short run cannot necessarily be inferred from what must happen in the long run, and we live in the short run.
Keynesians believe that prices, and especially wages, respond slowly to changes in supply and demand, resulting in periodic shortages and surpluses, especially of labour. Even Milton Friedman, one of the famous American economist, acknowledged that “under any conceivable institutional arrangements, and certainly under those that now prevail in the United States, there is only a limited amount of flexibility in prices and wages.” In current parlance, that would certainly be called a Keynesian position (Buchholz, 1989).
Theory on application of modern theory for ideal functioning of economic setup
Keynesians do not think that the typical level of unemployment is ideal—partly because unemployment is subject to the caprice of overall demand, and partly because they believe that prices adjust only gradually. In fact, Keynesians typically see unemployment as both too high on average and too variable, although they know that rigorous theoretical justification for these positions is hard to come by. Keynesians also feel certain that periods of recession or depression are economic mix, not, as in real business cycle theory, efficient market responses to unattractive opportunities (Sargent, 1993).
Keynesian economists often argue that private sector decisions sometimes lead to inefficient macroeconomic outcomes which require active policy responses by the public sector, in particular, monetary policy actions by the central bank and government policy actions by the government, in order to stabilize output over the business cycle. Keynesian economics advocates a mixed economy – predominantly private sector, but with a role for government intervention during recessions (Heilbroner, 1999).
Keynesian economics served as the standard economic model in the developed nations during the latter part of the Great Depression, World War II, and the post-war economic expansion (1945–1973), though it lost some influence following the oil shock and resulting stag inflation of the 1970s. The advent of the global financial crisis in 2008 has caused a resurgence in Keynesian thought (Buchholz, 1989).
Buchholz, T. G. (1989). New ideas from dead economists. New York:: New American Library.
Heilbroner, R. L. (1999). The worldly philosophers. New York:: Simon & Schuster.
Sargent, T. J. (1993). Bounded rationality in macroeconomics. Oxford [England]: Clarendon Press.
Contradictory Arguments on the Issue
The Global Economic Crisis is considered as the gravest issue in world economy since the great depression. It is perceived as a situation in which economies of countries come across a major downturn which results in declining GDPs, depreciation of liquidity and a greater disturbance in prices due to inflation and deflation. This effect is going on in a global scenario depicted by events in many countries. (McKibbin & Stoeckel, 2009) How this issue connects to security is an aspect to be observed by all countries.
The global economic crisis influences the factor of security of countries through the impact on GDP. As the GDPs of countries decline, so does the investment on security. In the countries which do not face declining GDPs, face similar problems by having to reduce government expenditure to avoid credit defaults which in turn affect the defense expenditure. In the post-cold war scenario, the crisis impacts securities related to both types of countries: the ones affiliated to alliances and independent countries. At a united global security, NATO also faces the consequences of the crisis by receiving reduced funding. (Constantinescu, 2011)
Reflecting on the data published by the European Defense Agency, out of the 26 existing members, 16 have reduced their funding. This directly impacts the expenditure on equipment procurement and research. Observing the other effects the crisis, an economic downturn causes low economic activity which gives rise to unemployment. This raises a serious national security concern for a country. A general decrease in the wage level also gives rise to grave social issues causing security concerns at a national and state level. This influences the expenditure on education expenses which means that a minor portion of the population might not go through the education system leaving them prone to elements which raise threats. (Crumley & Karon, 2009)
Even after disregarding the issues of internal national security, there are elements of terrorism arising on a worldwide scale. Acts of terrorism impact many countries but they require resources in the defense department to fend off terrorists and to increase security for protection to terrorist acts. Due to a worldwide economic crisis and decrease in investment in defense (in both areas of weapons procurement and R&D), countries face lack of firepower to resist the terrorist forces. The decrease in defense funding was considered as a practical step after the end of a cold war situation which led to nuclear stockpiling but all countries now need to form an effective shield against acts of terrorism. If acts of terrorism become successful, the affected nations become liable to invest for rehabilitation. (Braddon, 2009) International organized crime poses a threat to multiple nations through criminal penetration of global energy markets, weapons smuggling and corruption of military officials. This requires countries to view the issue not as a threat to national security but as a seamless threat which needs to be controlled and removed.
The earlier increased investment insecurity also provided employment, through construction of military infrastructure, maintenance of army vehicles, and recruitment in the military. Due to the crisis, it has been negatively influenced and new negative effects have come to light bringing a new perspective of the global economic crisis. (Zakheim, 2009) In Pakistan, a problem of dealing with terrorist forces has arose due to the decreased availability of funds for defense. Even the recent actions of the terrorist group ISIS raises a concern on the front of terrorist actions which can be curbed by defense resources in countries as they cause a threat to multiple countries. (Nanto, 2009)
The global economic crisis causes a greater divide between the rich and poor segments of society which cause an increase to people in general being dissatisfied with the economic conditions of the country. This factor supports the idea of people moving towards anti-social elements to get a fair amount of pay like corruption and other evils of society like extremist movements and rebellions through riots and other activities leading to chaos and a breach to national security. This is a problem caused by long term effects but as the world economic crisis is a long term event, taking steps towards these concerns is very important for every country. (Crumley & Karon, 2009)
The implications of threat to national and international security caused by the global economic crisis are wide and profound. The global economic crisis and its repercussions expand to all the countries through various means and cause threats to multiple nations mainly due to decrease in the defense funding for the individual nations as well as the funding provided to organizations like NATO and European Defense Agency which serve to protect multiple nations.
Braddon, D. (2009). World Financial Crisis: What it means for security. Retrieved from Nato Review: http://www.nato.int/docu/Review/2009/FinancialCrisis/Defence-Budget-Financial-Crisis/EN/index.htm
Constantinescu, M. (2011). DEFENSE AND SECURITY EFFECTS OF THE ECONOMIC CRISIS. Journal of Defense Resources Management, 143-148.
Crumley, B., & Karon, T. (2009, Feb 25). Is the Economic Crisis a Security Threat Too? Retrieved from content.time.com: http://content.time.com/time/world/article/0,8599,1881492,00.html
McKibbin, W. J., & Stoeckel, A. (2009, November). The Global Financial Crisis: Causes and Consequences. WORKING PAPERS IN INTERNATIONAL ECONOMICS. The Lowy Institute for International Policy.
Nanto, D. K. (2009). The Global Financial Crisis: Analysis and Policy Implications. Congressional Research Service.
Zakheim, D. S. (2009, March). Security Challenges Arising from the Global Economic Crisis. Retrieved from Forign Policy Research Institute: http://www.fpri.org/articles/2009/03/security-challenges-arising-global-economic-crisis
Global Financial Crisis and the Response of UAE Central Bank
The global financial crisis was a vastly affecting economic event which spread like a plague over the economies of the world. Every economy of the world started planning ahead at the advent of crisis to ensure economic stability in their country. The crisis occurred after the downfall of oil prices which affected the Middle Eastern countries more adversely than others as a major amount of their revenue is generated from the oil industry sector. The central bank of UAE took charge of the situation and made changes in the lending rate and reduced it by 2% and also reduced the REPO rate by 1.5%. As initial measures to alleviate the problems of the UAE banks, the UAE central bank also took measures to increase the liquidity of the banks to sustain the economy. The GDP growth rate of UAE dropped from 9.8 to 3.2% due to the financial crisis and the objective of the actions taken by the central bank of UAE were to sustain the GDP growth rate of UAE (Trading Economic, 2015).
In 2009, some of the groundwork changes that were made by the central bank of UAE were to change to the capital adequacy ratio to 11% and planned to increase it at 12% after 6 months. As UAE was facing major consequences of the economic downturn by 2008, UAE central bank decided to buy bonds worth 10 billion from the emirate of Dubai. This step was to re-assure the investors in UAE that it is safe to invest in UAE. At this point of time, UAE was facing a slump in the real estate sector in which many ongoing projects were being affected and Dubai was at a relatively better state with a stock exchange that was advancing after a sharp fall (The New York Times, 2009).
In 2009, the central bank did not make interest rate changes and continued with the changes made in 2008 as those changes were made for sustainable growth of the economy to fend off the global financial crisis. (Interact, 2009)
Economic Overview of UAE 2
Economic Diversification 3
Growth of Oil and Non-Oil Sectors in the last Decade 5
Contribution of Labor in Growth of Non-oil Sectors 6
Contribution of Free Zones in Growth of Non-oil Sectors 7
Contribution of the Stock Market in Growth of Non-oil Sectors 8
Conclusion and Recommendations 9
Economic Overview of UAE
This report sheds a light on the economic scenario of UAE and how the current scenario of the GCC economies have led them to diversify their economy in order to generate revenues from non-oil sectors in order to sustain GDP growth for the future. This requires a brief economic overview of UAE and regarding UAE’s economic growth. The economic contribution of oil and non-oil related sectors will be analyzed to depict the significance of economic diversification in UAE due to the future projections of oil prices by OPEC.
The economic scenario of UAE was mostly based on fishing industry and a weakening pearl industry. The economy of UAE was finally kick-started through oil exports which began with the oil industry of Abu Dhabi. The revenue generated through oil industry was diverted towards the development of sectors like infrastructure, education and healthcare under guidance of the late Sheikh Zayed. A profound transformation has been witnessed in the economy of UAE after the discovery of oil leading UAE to become an ultra-modern state which reflects an alpine standard of living. (Central Intelligence Agency, 2015) Abu Dhabi contributes to 90% of UAE’s oil generated income whereas Dubai is a hub of infrastructure, commerce, finance, and tourism.
Figure 1 Contribution of sectors in UAE’s GDP in the year 2009
All of the GCC countries project a heavy reliance on oil for revenue generation and economic growth. The GDPs of GCC countries have been increasing for the past years due to increased government expenditure and a swift increase in oil revenues. The organization of petroleum exporting companies (OPEC) originated to coordinate policies regarding petroleum for managing the supply of oil from the OPEC regulated countries and setting oil prices at a global scale. Regarding the oil reserves which the OPEC manages, 52% of them is obtained from the GCC countries. Considering this factor, the significant role of OPEC in the economic growth of UAE as a GCC country can be perceived. (GulfBase, 2015)
Economic diversification can be taken as the transformation process of the economy in which the revenues in the economy are generated through many different sectors. This term is primarily associated with export diversification of a country. When a specific nation or group of nations rely on one particular commodity for economic growth, there are very good chances that when the prices of that particular commodity decrease or turn volatile, the nation’s economy can be adversely affected by a very high magnitude affected the financial and economic condition of the country. These kind of problems can affect least developed countries and also the countries which exclusively rely on oil exports for economic growth and sustainability. In case of oil exporting countries, fluctuations in the primary commodity can cause the market to become extremely vulnerable to price change. (Shediac, Moujaes, Abouchakra, & Najjar, 2008)
If a country does not diversify its economy then it cannot effectively grow in a sustainable manner through long term prospects. In case of oil dependent economies, it is an even concerned factors because of the depletion in natural resources. The underlying issue is that diversification alone cannot alleviate the economic issues in a long term perspective and the country needs to focus on sectors which can provide sustainable growth and development.
Focusing on UAE as an oil dependent country which is a part of GCC countries, its heavy reliance on oil for economic growth can be observed as a hindrance for sustainable development. Diversification of a country can be witnessed by observing the distribution of GDP over different economic sectors. This activity leads to the formation of a concentration ratio again leading to the formation of a diversification quotient. (Hesse, 2008)
Figure 2 Concentration Ratio and Diversification Quotient in GCC Countries
Growth of Oil and Non-Oil Sectors in the last Decade
UAE has been endowed with both offshore and onshore oil resources. Since the 1970’s, UAE has been largely dependent on oil resources and growth of oil sector industries. In the last decade, UAE’s oil production capacity has been 3 million barrels for each day and has been increasing. In 2000, the quantity of gas reserves amounted to 6 trillion cubic meters which accounted for 4% of the total world gas resources. The maximum growth was observed in the manufacturing sector at the beginning of the decade and the GDP contribution of oil related industries accounted for 12.8% of the total GDP of UAE and was increasing further.
Around ten years back in 2006, the GDP of UAE had increased to 599.3 billion AED which was a phenomenal increase of 23.9 percent compared to 2005. Due to production cuts regulated by OPEC, oil prices surged and economy of UAE kept growing due to the growth in oil industry and its related exports. However due to an increasing revenue generation and development observed in the non-oil sectors in 2007, the GDP contribution of oil related sectors decreased by 2.3% and became 35%. The earlier surge recorded in the oil prices in the year 2006 led to an increase in trade balance surplus and value addition to UAE’s exports and re-exports. (Economy Watch, 2015)
After 2007, the contribution of non-oil sectors began increasing and the growth in banking sector was the most noteworthy among the non-oil sectors. Increase in the total amount of assets was 43.4% making UAE the leading country in the banking sector among the GCC countries. Simultaneously, the sector project the highest amount of growth after banking among the non-oil sectors was the construction sector due to the increased investment in the area of infrastructure by the UAE government. (Hvidt, 2013)
Excellent market conditions due to free trade zones led non-oil private sector to grow. Due to the reduction in oil prices caused by the global financial crisis in 2008-2009 decreasing the GDP growth to a negative of 1.6%. This led the OPEC advising oil dependent economies to consider diversifying their economies and aim for sustainable economic development through non-oil sectors. (John, 2014)After the oil price sink of 2008-09, GCC sectors have projected development in non-oil related sectors till date, especially UAE with it’s all round development in building trade zones, enhancing tourism, aviation and hospitality sector while also growing through non-oil foreign trade which has been steady for the last decade despite global economic crisis. (World Trade Organization, 2012)
Contribution of Labor in Growth of Non-oil Sectors
Inefficient labor and inefficient use of the industrial labor force hinder diversification of the economy. The labor force of UAE has been too reliant on the government projects for employment. Challenges lie ahead on the road to economic diversification for UAE as GDP growth takes labor growth also into account. The structural growth of UAE as a diversified economy requires skilled labor. The growth in UAE for the last 5 years in non-oil sectors is remarkable but UAE has been hiring expatriates also in all these sectors. For UAE to increase their GDP, they need emiratization, advancements in education and skilled Emirati laborers for overall growth in all sectors and a sustainable economic growth.
As foreign labor is cheap, UAE’s private sector has been hiring skilled foreign labor to sustain high productive growth. It is normal for a short run of development but long term sustainability in high productive labor requires skilled Emirati laborers. Effective labor distribution along with development of human capital is necessary for successful. Higher pay from growing private sector can only be possible if there is higher skilled labor force. Determining sector concentration for measuring diversification utilizes Normalized-Hirschman Index (NH index) which has been decreasing in UAE due to human capital investment. This factor has been taken into account in the UAE’s vision for the future. (Haouas & Heshmati, 2014)
Contribution of Free Zones in Growth of Non-oil Sectors
Dubai as an emirate initiated the free zone model in UAE which was an effort to attract foreign businesses to establish subsidiaries. The free zones allowed foreign businesses to establish subsidiaries with 100% ownership and operate without the factor of taxes. With a presence of 22 free zones, it has projected an availability to foreign businesses for business expansion in Dubai. The Jebel Ali port in Dubai is regarded as one of the largest free zones in the world. Free zones have contributed to the economic growth of UAE by providing 160,000 jobs and attracting foreign direct investment inflows which amount to 20% of the total inflow into UAE. (Government of Dubai, 2015)
This has been possible due to a strong economic development model which is feasible for expanding business sector and it also promotes globalization making it an epitome of the “Dubai model” for the future. This factor also brings attention to the fact that Dubai as a city has been pro-active in diversification as compared to Abu Dhabi which still relies more on Oil industry sector for GDP. (Hesse, 2008)
Contribution of the Stock Market in Growth of Non-oil Sectors
The UAE stock markets have been projecting a high level of performance compared to other regional or emerging stock markets. UAE stock market has been growing along with the economic growth of UAE. There was a downward stride in the UAE stock markets post 2008 continuing till 2013 which reflects the fact that low diversification led to a slow growth increase after the global financial crisis.
Figure 3UAE Stock Market Activity in the last Decade
As the oil reliant economy took a long time to bounce back after the crisis, it signifies how economic diversification is necessary for sustainable economic growth. Diversification in UAE economy will also lead to a stable stock market which is essential for healthy trading activities. The Dubai stock market projects the highest amount of activity in the Saudi Stock Exchange. The Dubai Financial Market was initiated in the year 2003 and saw a very exponential boom in the years 2004 and 2005 as majority of the financial activities and investments in projects occurred in that year. (SABRI, 2008)
Conclusion and Recommendations
UAE’s economy has projected a steady growth in GDP and GDP growth taking the exception of the Financial Crisis. But the financial crisis has been a wake-up call for UAE and all other GCC economies to diversify their economy by developing and investing in non-oil sectors for long term economic growth. The economic growth in the last decade showed that UAE as a country has been striving towards a diversified economy through their vision for the future through investment in infrastructure, tourism, hospitality, aviation and education.
For UAE to achieve diversification and sustainable growth, it should focus on developing human capital, emiratization, and investment in non-conventional energy sources and also focus on the field of agreements with other economically developing economies for investment and partnership in business activities for having a diversified economy.
Central Intelligence Agency. (2015). World Factbook – UAE. Retrieved from www.cia.gov: https://www.cia.gov/library/publications/the-world-factbook/geos/ae.html
Economy Watch. (2015, 4 15). United Arab Emirates (The UAE) Economic Statistics and Indicators. Retrieved from www.economywatch.com: http://www.economywatch.com/economic-statistics/country/United-Arab-Emirates/
Government of Dubai. (2015). Economic freezones in Dubai. Retrieved from www.dubaided.gov.ae: http://www.dubaided.gov.ae/en/pages/economic-freezones-in-dubai.aspx
GulfBase. (2015, 4 14). GCC ECONOMIC OVERVIEW. Retrieved from www.gulfbase.com: http://www.gulfbase.com/gcc/aboutgcc?pageid=93
Haouas, I., & Heshmati, A. (2014). Can the UAE Avoid the Oil Curse by Economic Diversification? Bonn: Institute for the Study of Labor.
Hesse, H. (2008). Export Diversification and Economic Growth. Retrieved from siteresources.worldbank.org: http://siteresources.worldbank.org/EXTPREMNET/Resources/489960-1338997241035/Growth_Commission_Working_Paper_21_Export_Diversification_Economic_Growth.pdf
Hvidt, M. (2013). Economic Diversification in GCC Countries: Past Record and Future Trends. London School of Economics and Political Science.
John, I. (2014, 12 15). Opec chief calls GCC to adopt economic diversification. Retrieved from www.khaleejtimes.com: http://www.khaleejtimes.com/biz/inside.asp?xfile=/data/uaebusiness/2014/December/uaebusiness_December183.xml§ion=uaebusiness&type=desktop
SABRI, D. N. (2008). Financial Markets and Institutions In the Arab Economy. New York: Nova Science Publishers, Inc.
Shediac, R., Moujaes, C. N., Abouchakra, R., & Najjar, M. R. (2008). Economic Diversification: The Road to Sustainable Development. Retrieved from www.strategyand.pwc.com: http://www.strategyand.pwc.com/media/uploads/Economic-Diversification.pdf
World Trade Organization. (2012). Trade Policy Review Report – United Arab Emirates. World Trade Organization.