Balance Of Payments And Trade In Uae Economics Essay

brace Of Payments And Trade In Uae Economics EssayThe UAE is one of the strongest and prosperous economies of the world. It has been growing continuously e realwhere the past few days. The argonna has been growing at the average lay of 6% per year in the past decade. In the former years the verdants sparing was major(ip)ly dependant on the tax generated by pile of embrocate and inunct colour products. entirely from the last decade the economy of the UAE has been diversified and is outright contri hardlyed by other industries like, tourism, real realm and construction. Currently the oil and petroleum sector greenbacks solo for one third of the total gross domestic product of the realm which used to be three fourth parts till 1980. The watercourse per capita GDP of the UAE is one of the highest in the world, 24,000 USD. The export and import policies and strategies of goods and service in UAE mainly depends upon the kick allot in zones in the clownish because i n these free trading zones mostly non oil products be being hatfuld. The main clear of these trading zones is that they be exempted from the cadence con rack uping and irritating obligations of licensing and completely. The inter acresal and global traffic and business relationships of the UAE with other countries like India, China, Japan and European essence has been improved in the past years and the quietus of pay backments and trade has as well as been step-upd in these years. Previously the artless was in famine of equipoise but this instant the sense of equilibrium wheel has risen to redundancy amount. ( rest Of Payments BOP) ( equalizer Of Trade Definition)Balance of PaymentThe sense of equilibrium of payments (BOP) is a record of all transactions amidst one particular unpolished and the rest of the countries. It compares the difference of foster of imports and exports of products, services and fiscal transactions in terms of dollars. TheBOP include s thetrade commensurateness, distant investments and investments by foreigners. The BOP calculates international transactions for a specific time period, normally one year. For nation sources of bloodlines like exports and investments are prodigality items and use of funds like imports and invest in foreign countries are deficit items. BOP indicates the frugalal and political stability of the country. You can study it, i.e., if a country has a positive BOP, it means that there is demonstrable foreign investment within that country. The shelter of national currency of a country gets appreciation if the BOP is positive. If the shelter of a countrys import is higher(prenominal) than the value of its exports consequently the poise go forth be in deficit. A deficit in the balance shows a dependency on foreign investors or an overvalued currency. After including all components in BOP sheet, it must balance. The boilersuit superfluous or deficit must be zero. If a deficit in the balance then the country pays off the difference of value by exporting deluxe or consented hard currency. When a country is not able to pay for its debt repayments then it is called as currency crisis or BOP crisis. It came with rapid decline in nations currency value. It occurs because of large hood flow which is related to economic growth. However at a header foreign investors become concerned close to their inbound seat of government and gazump out funds. The rapid drop in the value of currency occurs because of the capital outbound flows. This causes an issue for business firm of affected country who has authentic loans. unusual reserves try to support the domestic currency with very limited options after government fatigued. It increases the interest rates in fix up to prevent declines in value of currency. There are three methods to check balance of payment imbalance. Adjustment of nations internal bells and adjustments of deepen rates are important methods. (B alance Of Payments BOP)Rebalancing by adjustments of exchange rateAn increase in the value of currency of nation make imports cheaper and exports less matched. So it tends to temper sure considerancy surplus and make flow of investment less mesmerizing towards capital account in order to servicing with a surplus. conversely a decrease in the value of currency of nation makes things big-ticket(prenominal) for people to buy and increase the competition in exports with the others. Thus helps to correct the deficit. If nation is selling much and imports less, than the aim of currency increases because selling nations currency volition be the need of other countries to make payment for the exports. If nation is exporting goods of less value and importing value is more than to pay for the excess import value it replace it with foreign currency so the currency will increase in international market consequently value of currency tends to fall. BOP effects are also influenced by the difference in interest rates of nations. (Balance Of Payments BOP)Rebalancing by adjusting internal prices and demandMaking changes in the domestic economy is a standard plan of attack to correct imbalance, when exchange rates are fixed by gold standard or when imbalance is among members of currency union. Change is optional for the country which is in surplus but it is must for the deficit country. Mechanism is spontaneous in case of gold standard. If a nation has approving trade balance then there will be an inflow of gold. It will increase the money supply because of this prices increase and inflation occurs thus decreases surplus. If a nation has deficit BOP then there will be an outflow of gold and occurs a deflationary effect so that prices trim and makes export more competitive, thus do the re-balance. (Balance Of Payments BOP)Balance of TradeThe balance of trade being a larger part of the economic unit, BOP, which includes all economic transaction amidst one count ry and the rest world. If a nation exports more than it imports then it has trade surplus or well-to-do balance of trade. If imports are more than exports then it has trade deficit or unfavorable balance of trade. There must be a favorable balance of trade but classical economics says it to be more important as for a nation so as to in full utilize its available economic resources rather than to build a trade surplus. The balance of trade indicates the nations international economic position.Factors affecting the balance of trade is inclusive ofThe cost of manufacturing of product and services in the exporting country is different than that in the importing country.The price and availability of other accessory products, raw material and other required inputs.Fluctuation in exchange rates.Various restrictions on different type of trading mediumNon economic hurdles like, environmental, health and social.Trade deficit is bad or not, it depends on business cycle and economy. If a cou ntry is in recession then it would like to exports more in order to create demand and jobs. But in strong expansion, nation would like to imports more which raise price competition and limits the inflation. So a trade deficit may help during an expansion but not good in recession. (Balance Of Trade Definition)The UAE Balance of PaymentThe UAE is a member of the GCC trade group and also a member of World Trade Organization, World Bank and world-wide financial Fund for the past ten years. The country has never required financial help from the World Bank or the International Monetary fund because of its strong financial position and huge treasures of wealth. Balance of Payments which is an important economic indicator to determine the countrys financial condition in the global market, in the previous year was more than 100 cardinal AED because of the real estate and construction business in the country. In the previous year the authorized reserve account of the UAE has been increa sed by 50 trillion AED. The economy of the country is majorly driven by tourism, construction, real estate, and oil industry. So the balance of payments has to be done from various perspectives in the UAE. According to the IMF three major accounts need to be taken care of for the balance of payments in much(prenominal) a diverse economy, these accounts are (McRae.)Current visor This account keeps piece of music of the countrys assets from trades of goods and services and one sided transactions from foreign countries. In the year 2004 the UAE underlying Bank recorded the total balance of -9 billion AED.Capital Account This account is for the flow of payments of capital items. In 2004 IMF reported 78,062 million UAE capitals of machinery, health check and electricity. The export value of the above capital was 610 million AED. The trade surplus reported by CIA in 2004 was $19 billion.Financial Account This account handles the trade of stocks and bonds, currency transaction. Th e net investment projected by the International Monetary Fund in 2005 was 26.3 billion AED. The 392 commercial banks of the country dumbfound the total deposit of 491,523 million AED.Business Monitor International is a leading publisher of highly specific business information about the global markets of the world. In a report of BMI it is mentioned that the international trade of UAE will increase because of the improved two ways trading with US, Iran and SA. The boost in tourism and expansion in hotel and airport projects will also fortify the position of UAE in balance of payments, the measure of payment flow between a country and the rest of the world. According to the report the import of the UAE is increase by 8% per year whereas the export is declining by 6% in 2009 but is forecasted to grow again by 11% in 2011. The report also said that the ongoing account balance of the UAE is more than 20% of the GDP for the forecast period which will definitely rise as the result of im proved trading relations and flourishing tourism of the country. The Balance of Payment of the UAE in 2007 was 22.2% of the GDP which decreased till 2009 and is expected to increase up to 25.2% in 2011. According to the National US-Arab Chamber of Commerce the export of US to the UAE was increased by 40% between 2005 ad 2006. The re-exporting potential of the UAE is certainly good news for the balance of payments of the country. (FRANCO, 2007)Balance of Payment is the sum of exports products and services and net income like interests and foreign aids. Current account balance is a major indicator of any countrys financial condition. The current account balance or the balance of payments for UAE in the year 2005 brought the country at 13th rank in the world. It is 136.32 pct more than in the previous year. In 2006 UAE was on ranked as 10th country for the current account balance of 36.158 billion US$ which is around 60 percent more than in 2005. In 2007 UAE recorded a decline of 46 p ercent in the current account balance and rolled set down to 20th ranking. In 2008 the current account balance for UAE increased by 13 percent and came at 19th position. In 2009 UAE recorded a drastic dip of 130 percent in the current account balance and came at 163rd ranking in the world. (FRANCO, 2007)The UAE Balance of TradeThe balance of trade of the United Arab Emirate in the December of year 2008 was recorded to 231.1 billion AED. The economy of the country is no more dependent on the oil and petroleum products but still they are an important part for the revenue of the country. The major ingredients of the countrys imports are machinery, chemicals, transport equipments, and food and the major trading countries with UAE are India, China, Japan and European Union. The following figure shows the trade balance chart of the UAE. (United Arab Emirates Balance of Trade)The trade balance of the UAE has been very much dependant on the oil and petroleum revenue. The trade balance of UAE including the oil products has always been surplus in the past years whereas excluding oil and petroleum the trade balance was in deficit throughout the last decade. The country recorded a surplus in trade balance (including oil) of 19% of the total GDP in the year 2004, the value of which was 63 billion AED. The deficit in trade balance (excluding oil) in 2000 was maximum i.e. 26% of the GDP which has been change magnitude gradually in the past years and as recorded only 8% of the total GDP in year 2004 with the value of 27 billion AED. (U.A.E. Trade Policy)The trade balance of UAE from the past years has been notice to be shifting from deficit to surplus. A recent report from the Ministry of Foreign Trades of the UAE said about the commercial and business relations between UAE and India that the trade balance of UAE with India which was in deficit of worth 7.3 billion AED in the Q1 of 2009 has like a shot been moving to positive side and in the Q1 of 2010 the trade balance was in surplus with the amount of 2.2 billion AED. The comparison of these two quarters shows that the value of non oil international trade between the two countries has been increased up to 83%. The value of the international trade in the Q1 of 2009 was equal to 20.5 billion AED and the value of trade in the Q1 of 2010 was 37.5 billion AED. These economic indicators are the trial impression of strong bilateral business and commercial relationships between the UAE and India. The development and the skill of the UAEs economy can also be seen from the results of the fiscal policies and strategies of the countries and their execution. The country has instantly developed a diversified economy and exports of non oil products. (UAE achieves a surplus of Dh2.2billion in its trade balance with India, 2010)ConclusionThe above discussion of the balance of payments and balance of trades of the UAE depicts that the foreign trade and international fiscal and business relationships of the count ry has been improved in the past years. The balance of payments which used to be on the negative side and the country under the debts of other foreign countries has now shifted to the brighter side and increase to the surplus amount. The balance of trade of the UAE was majorly dependant on the export of oil products in the previous decade. But now the trade balance of the country majorly consists of export of non oil products. The trade balance of the country with other countries was in deficit in the previous year but now it has been increased to the positive side and stood up with surplus value.