Circular Flow Model Economics Report

Circular Flow

Title: Economic Circular Flow. Everyday expenditure is determined by the current treads on the economic status of a country. The prices of commodities has been influenced greatly by the prices treads of the energy generating fuels such the prices of the petroleum products. In addition the economic stability of a country is another key factors that determine the prices. For example in a country that is experiencing inflation, the prices of most commodities are relatively high, a fact that is contributed by poor performances in exchange rate earnings.

In most cases, the interest rates are mostly determined by the central bank. They are used as the main monetary tool that is used by policy makers and the economist to control the supply of money in the economy thus regulating the inflation rate in the economy. The central bank is there to issue loans to the commercial banks so that they can circulate the money to the citizens. In addition the commercial bank gives the commercial banks the directives on the minimum rate at which they are going to lend their customers. Therefore the federal system is the main determinant of the interest rate irrespective of the market forces on demand and supply of money.

Basically interest rate are use as incentive as well as disincentives to the people willing to take loans from any commercial banks. As an incentive, the commercial banks well give out loans at an affordable interest rate that will attract many business and other people willing to take a loan. This will increase the aggregate money supply in the economy. This is commonly used in case an economic stimulus is necessary. On the other had high interest rates discourages business taking loans.

The action leads to reduced business transactions and hence less amount of money circulation in the economy. The action is used during the period of inflation. When the interest rates are high, the prices of commodities are also relatively high, the consequence is high cost of financing the loans. For this reason people tend to purchase commodities that are of lower prices, this is always subject to quality. During my purchased the interest rate were lower therefore the price of my vehicle was relatively low. At the period the interest rate was about 14% compounded on reducing balance.

The price of gasoline was relatively lower compared to the previous prices. In every economy the prices of the petroleum products greatly influence the prices of other commodities. This is due to the transportation of commodities from the area of manufacturing to the market. Lower prices of gasoline in during the time of the purchase therefore ensured that the prices were lower and affordable. The prices for the crude oil and other related products were also low. Therefore even the maintenance of the vehicle was cheaper. When I made my purchase the prices of gasoline were dropping which was an implication that the future prices are going to be lower. This was just a prediction that is always necessary thing to do before buying any consumable good.

Securing a loan requires collateral and other securities. Most banks will. Always give loans to individual who after a careful appraisal shows the ability to pay the loan. In addition to this banks prefer giving loans to the people who are employed or business people who show to have a sustainable businesses that can be able to finance the acquired loan. I went for a loan after I was employed having considered all the above factors. These are the once that led to a successful loan application.

During the recession period the economy is characterized by high inflation rate meaning that the prices of most commodities are considerably high. During the purchase the interest rates were lower a probable recession times. The lower interest rates in the commercial banks were to encourage more people to take loans. This is a move that facilitates the increment in the supply of money circulation in the economy. In addition to this reduced interest rate facilitates more investors to borrow loans to set up more investments. This action is there to improve the production business cycle that improve the production of an economy.

During recession period there are chance of unemployment and therefore it’s risky to take a loan during the period. However when taking a loan it is important to reconsider other sources of income that can fund the loan once the source of income is suddenly withdrawn. Before making my decision on whether to take the loan or not I had considered other factors that will finance my loan in case of such uncertainty.

Due to the great recession of 2008 that the country realized its impact the government is still operating on with the fiscal expansionary policy measures despite of the deficit that the country was experiencing. Fiscal policies involved reduction on taxes and adjustments on government expenditures. The tax relieve lowered the prices of the vehicles greatly which gave me a good opportunity to purchase a good Car of my choice.

In addition the international monetary fund study had realized a possibility of positive multiplier effect on the expansionary fiscal policies that had been set. The effect was subjected unemployment and future output. More output and employment implied better future of the economy. These were encouragement to the foreign and local investors, consequently there were prospects of high future productivity. This gave me a prediction that there is a larger probability of retaining my source of income as well as creation of more sources that will cater for the maintenance and financing my loan.

The united state environmental protection agency has been trying over the years to fight the environmental pollution has been a problem in our cities and towns. One of their effort is to encourage the vehicles and other fuel users to purchase machines that are fuel saving and those that operate with complete combustion of fuel to minimize the release of carbon monoxide to the environment.

These efforts should not be ignored as the implication on pollution is both health and economic problems, a fact that a well productive economy is composed of healthy people. For this reason I had to choose a simple vehicle that has low fuel consumption capacity.

The emissions such as carbon dioxide causes acid rain that has adverse effects on metallic structures which most of our houses and other structures are made of. In addition there is adverse effect on agriculture which is one of the source of raw materials for our industries. The emissions also may cause diseases after inhaling these poisonous diseases. This consequently minimizes the production level of the nationals and hence lower GDP.

Basically the circular flow model is made up of two sectors which determine income output and expenditure. Equilibrium state is arrived at when the tendency of income levels, expenditure and output does not exist. This is an implication that income, output and expenditure are equal. The buyer expenditure in this case becomes the sellers’ income. The income gained from sale of their product is also spent to pay for other factors of production. During the processes, there is transfer of income to the owners of these factors. These expenditures consequently leads to the circular flow of payments.

The Circular Flow Model

Circular Flow Model
Circular Flow Model

For many years the position of the circular flow economy has greatly influenced the prices. This is due to the monetary and fiscal policies that an economy takes either to control inflation or to correct a recession. Introduction of injections and stimulus of the economy also influence the expenditure. When the interest rate are high the money in circulation is reduced thus most consumers will have little money to consume. In addition due to uncertainty people will tend to hold money due to fears of the deflation and recession. Uncertainty about future tend to influence people to either hold money or use money in making future investment.

Other Relevant Blog Posts

Economics Dissertation Topics

Micro-Economic Environment

EFQM Model Economics

Economics Dissertation Titles

If you enjoyed reading this post on economic circular flow, I would be very grateful if you could help spread this knowledge by emailing this post to a friend, or sharing it on Twitter or Facebook. Thank you.

Economic Prediction Price Elasticity Model

Economic Prediction and Price Elasticity

Economics models are false and so government should ignore their predictions. Explain, discuss and evaluate the accuracy of this statement.

Price Elasticity – Economics models are the tools which economists use to predict future economic developments by measuring past relationships among variables such as household income, consumer spending, employment, interest rates, tax rates etc. and forecasting how changes in some of these variables will affect other variables. An economic model is said to be complete if it can accurately forecast many of the variables future course, however, no economic model can be complete in true sense. There are several forces outside the model that affect the calculation and forecasting of variables. There are two ways by which these outside factors affect the forecasting and economic predictions. The input errors are concerned with inaccurate assumption of outside variables and model errors which explains the deviation of the equation of economic model from the assumption to the actual. Hence, it can be said that economic models are subjective approximations of reality and are designed to explain the observation.  Therefore, the model’s predictions should be moderated so that it can accommodate the effect of random data variables (Deming, 2000).

Many researchers believe that economic theories and models simply provide ways to look at systems and determine how changes in variables affect the overall outcome. It also explains advantages and disadvantages of various economic models and systems. However, predictions and subsequent policy decisions are made after following value judgement of policymakers or the government. Therefore, the government should view at economic model only as a framework which provide insight of a contextual theory. More empirical evidence and real life economic parameters should be considered while making policy decisions based on economic predictions (Godley & Lavoie, 2006).

No economic model can perfectly predict the real future. A good example of the economic model’s failure is to predict the reasons for the global financial crisis of 2008. The prevailing economic model was deficient to provide sufficient attention towards the relationship between demands, wealth, and excessive financial risk taking. There were considerable research which had been conducted to uncover the same and also a new behavioural equation was added to the existing economic models. The true test of the new model will happen when it will effectively flag financial risk levels that would need a precautionary policy change. This is an ongoing process which consist of constructing, testing, and revising models and outside forces so that economists and policymakers can predict the future course of economy (Taylor, 2009).

Government neither can overlook economic models’ forecasts nor make predictions completely based on them. It has also been seen that economists seem to put aside political factors outside their equation. Politics among other outside factors is the most important factor that helps to determine the outcome of economic policy. In view of these analysis, it is suggested to use structural models which makes several “what if” economic analysis on several input combinations. In this way, the policymakers would have substantial information on various numerical variables and the forecast can be recalculated whenever required (Diermeier, Eraslan & Merlo, 2003).

Identify estimates of the price elasticity of demand for at least three different products

The “law of demand” suggests that the higher the price of a good, the lesser demand from consumers. This is the fundamental law of all economic models to predict the economic forecasts. In order to predict consumer behaviour in more details, economists use several techniques which evaluate the sensitivity of consumers’ demands with respect to changes in price. The most commonly used technique is known as “price elasticity of demand”. In simple terms, it is the proportionate change in demand given a change in price. For example, if a one unit decline in the price of a product produces a one unit increase in demand for that product, the price elasticity of demand is said to be one (Green, Malpezzi & Mayo, 2005).

Price Elasticity
Price Elasticity

Numerous studies suggest that the majority of consumer goods and services falls in the price elasticity of between .5 and 1.5. Essential products to everyday living, which have fewer substitutes, typically have lower elasticity for example, staple foods. Since, staples such as cereals are necessities in the diet, and are usually cheaper so that people safeguard their income for spending on such essentials when prices increase. Furthermore, lower income households tend to have higher price elasticity for food items than high income households. As food products occupies a large share of total income in these households, price changes have a substantial impact on the allocation of budget. On the other hand, magnitude of the elasticity for animal source foods such as fish, meat and dairy are higher than staple cereals as these are considered as luxury food items and there are always many substitutes available for consumption of these food choices (Andreyeva, Long & Brownell, 2010).

Goods with many substitutes, or are considered luxuries as are not essential, or whose purchase can be easily postponed, have higher elasticity. For example, the demand of automobile is considered as elastic as there are three kind of substitution takes place. In response of a unit price change, consumer of a new car can delay the purchase, or can choose to purchase another category of car or chose not to buy a new car and use another mode of transport. Furthermore, in case of buying a particular model of car, it would be highly elastic demand as there will be a lot of substitutes. On the other hand, demand for cars in rural areas would be inelastic over the longer run. Because there are very few alternative mode of transports available (Parry, Walls & Harrington, 2007).

Another example can be taken from health care services, where the demand for health care expenditure is found to be price inelastic. A range of price elasticity estimates it to be -0.17, which means that a one unit increase in the price of health care will lead to a 0.17 unit reduction in health care expenditures. Moreover, the demand for health care is also found to be income inelastic as it is in the range of 0 to 0.2. The positive sign of the elasticity suggests that there will be increase for health care demand as income increases, however the low magnitude of the elasticity indicates that the demand response would be relatively very small (Duarte, 2012).

Other Relevant Blog Posts

Economics Dissertation Topics

Micro-Economic Environment

International Economic Environment

References

Andreyeva, T., Long, M. W., & Brownell, K. D. (2010). The impact of food prices on consumption: a systematic review of research on the price elasticity of demand for food. American journal of public health100(2), 216-222.

Deming, W. E. (2000). The new economics: for industry, government, education. MIT press.

Diermeier, D., Eraslan, H., & Merlo, A. (2003). A structural model of government formation. Econometrica71(1), 27-70.

Duarte, F. (2012). Price elasticity of expenditure across health care services. Journal of health economics31(6), 824-841.

Godley, W., & Lavoie, M. (2006). Monetary economics: an integrated approach to credit, money, income, production and wealth. Springer.

Green, R. K., Malpezzi, S., & Mayo, S. K. (2005). Metropolitan-specific estimates of the price elasticity of supply of housing, and their sources. The American Economic Review95(2), 334-339.

Parry, I. W., Walls, M., & Harrington, W. (2007). Automobile externalities and policies. Journal of economic literature45(2), 373-399.

Taylor, J. B. (2009). The financial crisis and the policy responses: An empirical analysis of what went wrong (No. w14631). National Bureau of Economic Research.

Click Here To View Economics Dissertations

If you enjoyed reading this post on Economic Prediction and Price Elasticity, I would be very grateful if you could help spread this knowledge by emailing this post to a friend, or sharing it on Twitter or Facebook. Thank you.

Fashion Industry Economy

The Contribution Of Art And Fashion Industry To The National (UK) Economy

According to a report released by the British Research Council (2014), the fashion industry in Britain contributes £26 billion to the country’s economy. This is a 22 % increase from the contribution made in 2009 which added up to £21 billion. The report was released by the council during the London Fashion Week. These statistics intrigue various questions relating to the contribution of art and fashion to the economy of the country. Although art and fashion have been part of the UK’s culture for many years, their impact on a country’s economy has not been greatly considered over the years. However, in the recent years, the expansion of the global market has greatly impacted the art arena, which has further impacted the economy either positively or negatively.

Research Question: Is the art and fashion industry influential enough in the economy to attract both local and foreign investments in the long-term?

Purpose and objectives

The aim of the research is to assess the impact of the arts and the fashion industry on the economy in the UK in accordance to information revealed by the Arts Council and the British Fashion Council. The main objectives of the research will be to review and collate existing research relating to the economic impact of the arts and the fashion industry in the country. The other objective is to understand the measures and methodologies put in place for assessing the effect of creative industries, programmes, facilities and projects. Assessing the quality and comprehensiveness of the existing evidence is another objective of the research.  The research also aims at informing the future agenda for effective research within the sector. It will also include evidence-founded making of policies by the Arts Council and Fashion Council. Identifying fundamental research needs that will assist in improving the research’s robustness is another scope of the research. The proposal will also include a practical resource to help the parties working in the sector.

Theoretical Framework

The Keynesian theory states that the production of goods and services by the businesses is influenced by consumers’ ability to spend. The twenty first century has experienced changes in issues relating to increase in consumer spending, hence the increase in production of various goods and services. The arts and fashion industry has not been alienated from this impact. The rapid expansion of economies that started taking place in the late twentieth century through to the twenty first century has been of great impact globally. It is believed that one of the most impacted is the arts and fashion industry.

The consumption, investment, government and net exports characterize the Keynesian theory. This research will analyse these concepts in relation to the oil and arts industry, and how they have affected the economy in the UK. The research is also sensitive to the impact of the local fashion industry on its economy. It is relevant to assess whether the most impact is evident from exports or products bought by the local consumers. The household disposable income and the general GDP are of relevance to this research. It is relevant to understand the past scenarios relating to the industry and steps that have been taken to heighten the industry to the current position. As evidently put by Keynes, the increase in consumer spending will increase the production of goods. Consequently, a decrease in consumer spending will also decrease production in the industry. It is relevant to understand the individual contribution of the various sectors in an economy. This will allow the relevant parties to make decisions relating to the present and the future of the industry in question. In this case, it will be identified whether the impact on the economy, if any, is long-term. It is relevant to understand whether it can attract investors.

Empirical / Contextual Literature Review

The Art Council England and British Fashion Council provide various reports that reveal the financial/economic impact of the arts and the fashion industry in the economy. Other economic related sources will be assessed in order to realize the share of the industry on the overall economic figure. Research will be carried out in some areas such as the Research Department of the Arts Council. The research may also include email, telephone or postal inquiries from the Culture, Media and sports Department. Other sources include the Arts Council of Northern Ireland, Arts Council of Wales, the Scottish Arts Council, among others.

Fashion Industry Economy
Fashion Industry Economy

After the research process, a small number of studies will be gotten, read and evaluated with the use of Draft Standards for Reporting on Statistics (Hutton, 2001). Sharp and Benefield (2001) insist that the NFER (National Foundation for educational Research) guidelines to be incorporated in order to present quality research. The researcher will also scrutinize the references in order to assess whether there are other potential materials that are relevant. The review will mainly cover research that is done in the United Kingdom. This will include England, Wales and Scotland. In order to make the research more comprehensive, statistics relating to other countries such as the USA and Australia will be included.

The research will include literature which has information concentrating on the economic contribution of the fashion and arts sectors. The inclusion of the arts sector will also lead to the inclusion of some aspects of the creative industry and culture in the UK. The research will briefly give the social-economic aspect of the industry, due to issues relating to the employment arena and the general impact of the people’s livelihoods. The materials considered are gauged on various levels. They include a widened geographical spread, diversified study foci, diversified methodologies and approaches, research quality and studies target groups. Other issues relate to issues addressed or policy area, research date in question, impact on the sector and best evidence presentation. Blake (2000) reminds researchers that a review does not have to reproduce in detail the articulated claims relating to the economic impact of the fashion or arts industry. This is because they have been covered adequately in these resources. The researchers only need to find the information relevant to their topic and then integrate it accordingly in order to answer their research question (Jermyn, 2001).

The study design that will be used is the historical approach. Babin et al (2012) states that the historical approach is one in which information is collected by reviewing the historical data presented by older reports or valid sources of information. This empirical report should not be altered. In order to place more emphasis on historical study, Gillham (2008 state that historical method is something that exceeds simple data-gathering. It involves analyzing, and confirming the information retrieved from these sources by engaging other research methods. For example, interviews will be included in this research method. The true meaning of data collected should be reported from the point of view of the objectives and the basic assumption of the project under way. The facts obtained may be accurate expressions of central tendency, deviation or correlation; but the report is not research unless discussion of these data is carried up to the level of adequate interpretation. Data must be subjected to the thinking process in terms of ordering reasoning. The design also saves on time. The researchers are also able to present factual information from the target resources using cheaper means.

Methodology

The main method will include reviewing the past and current statistical information available on the materials. However, interviews will be integrated in the research method. The interviews will be done in order to verify some of the unclear data, or place emphasis on the available information. Such technique will be used for target people who may provide more information other than the information available in the report. Since interviews are one-on-one, the researcher is able to read other forms of communication such as body language, hesitations, amongst others (Creswell, 2003). Interviews also limit the time that the information will reach the researcher.

Additionally, questionnaires will be handed to people who will not find time for interviews. It can be passed through emails or other communication channels agreed upon by the researcher and the target person. As indicated earlier, it is used to verify information that is unclear or that which has not been updated. VanderStoep & Johnston (2009) indicate that the measurement quality is highly dependent on the reliability of the instrument used to collect data. In order to follow this statement, the researcher will pre-test the questionnaires being used. Validity entails, whether the spirit of the questionnaires is in accordance with the purpose of the research. In order to confirm validity, selected questionnaires will be given to respondents in order to pre-test data collection. Once the questionnaires are returned, they will enable the accurate assessment of the validity of research instruments. The questions in the questionnaires will also be used to conduct the oral interviews. The questionnaires will not be included in the final analysis.

References

Babin, B. J., Carr, J. C., Griffin, M., & Zikmund, W. G. 2012,. Business research methods (9th ed.). Stamford, CT: Cengage Learning.

Blake Stevenson Limited, 2000, “The Role of the Arts in Regeneration”, Scottish Executive Central Research Unit, Edinburgh.

Creswell, J. W. 2003, Research design: Qualitative, quantitative, and mixed method approaches. Thousand Oaks, CA: Sage Publications

Gillham, B. 2008, Small-scale social survey methods: Real world research. London: Continuum International Pub. Group.

Hutton, L, 2001, Draft Standards for Reporting on Statistics, The Arts Council of England. 110

Jermyn, H, 2001, The Arts and Social Exclusion: A review prepared for the Arts Council of England, The Arts Council of England, Londo.

Sharp, C and Benefield, P, 2001, Literature Reviews Course Notes, NFER, unpublished.

VanderStoep, S. W., & Johnston, D. D. 2009, Research methods for everyday life: Blending qualitative and quantitative approaches. San Francisco, CA: Jossey-Bass.

View Economics Dissertation Topics Here

Economics Essay Monetary Union

Balance of Advantages of the UK Joining the EMU and/or Using the Euro as a Functional Currency

Introduction

The Economic and Monetary Union is an agreement between participating European nations to share a single currency, the Euro and a single economic policy with set conditions of fiscal responsibility. There are currently 27 member-states of varying degrees of integration with the EMU.

Currently there are 16 member states who adopted the Euro: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia, Spain, Cyprus, Malta and Slovakia. Further 3 countries including United Kingdom, Denmark and Sweden did not join the EMU even though they had an option to do so. Main reason for the UK not to join the Euro was the strength of the Pound and the British economy against the countries in the Euro zone. Joining EMU was predicted to cause economic problems in the country as European Central Bank would seize full power over the monetary policy in the UK including for instance setting benchmark interest rates. Economists are therefore divided into two groups: pro and cons the EMU. Aim of this report is to show on the example of invented for the purpose of the report Multinational Corporation (Insomnia plc) the influence of UK joining the EMU and/or using Euro as a functional currency.

History of Insomnia PLC

Insomnia plc is a UK based Multinational Corporation with their headquarters in Aberdeen, Scotland. The company was founded in 1987 by Mira Stavika. Insomnia designs, produces and sells luxurious clothing, shoes and accessories for adults and kids. The company has internationalized through subsidiary undertakings in Italy, Spain, Germany and France as well as international trade with India, where the clothing is manufactured and exported to UK. The special packaging for cloths is produced in Slovakia. Since 2001, the company is listed on the London Stock Exchange and the largest German stock exchange in Frankfurt (FWB Frankfurter Wertpapierborse). The corporation owns approximately 60% of each subsidiary.

Scope of Business

After importing clothing to the UK, Insomnia stores it and resells majority part of it to their subsidiaries at the 20% mark-up. The remaining part is being sold in the UK. Subsidiaries and parent trade the clothing in the Insomnia branded shops. Apart from the payments for the import of clothing, foreign entity has to pay to its UK parent the management fee for the administrative and managerial services it provides. Out of the profit the foreign entities obtain, 70% is re-invested in their business; the remainder is paid to shareholders in form of dividends. Almost 40% of Company’s debt is denominated in Pound Sterling where the remaining part (60%) is in Euro. Revenue of the company comes in 70% from Euro and 30% from UK braches in Pound Sterling.

Parent company uses Pound Sterling as a functional and reporting currency, whereas all of the subsidiaries occupying in the Euro zone, use Euro as a functional and reporting currency.

Monetary Union
Monetary Union

Current Exposures in  a Monetary Union

Insomnia plc trades mainly in the foreign markets. This exposes the company into a series of uncertainties mainly regarding the exchange rate of the currencies. Exchange rates cannot be predicted with the ideal accuracy, but companies can at least forecast their exposure to exchange rates fluctuations which comes in three types.

Transaction Exposure

Transaction exposure is the degree to which the short–to–medium term cash flows denominated in foreign currencies are affected by the exchange rate fluctuations. This type of exposure has direct and large effect on the value of the company’s earnings.

Insomnia is highly affected by this type of exposure due to majority of its operations denominated in foreign currency. Buying clothing from the manufacturers in India and selling these to their foreign subsidiaries highly exposes company. Depending on the economic conditions, value of Indian Rupee and Euro can change rapidly within short period of time (Even as much as 10% within a year; Madura, 2007). Invoicing of clothing imported from India is denominated in Rupee, so if the value of this currency appreciates against the Pound, payables of UK company will increase and adverse. Similarly sales of the clothing to subsidiaries are invoiced in foreign currency, the Euro, which can affect cash flow in the adverse way to Rupees. Transaction exposure affects debt as well. Due to the Euro/Sterling exchange rate increase by 16.3% in 2009, debt of the company increased significantly last year as 60% of debt is denominated in Euro.

Economic Exposure

Extent to which present value of company’s future cash flows are affected by the exchange rate fluctuations is referred as economic exposure. ‘All types of anticipated future transactions that cause transaction exposure also cause economic exposure because these transactions represent cash flows that can be influenced by exchange rate fluctuations. Economic exposure includes transaction exposure and indirect effects on revenue and cost. ’ (Madura, 2007)

Insomnia is exposed as well to the economic exposure. If the Indian Rupee appreciates against the Pound as in previous example, the company may need to increase the price of clothing sold in the UK and price of goods sold to subsidiaries as will have to pay more for the supplies. In this case, customers might shift their purchases to the cheaper clothes’ retailers both in the UK and Euro zone which will decrease export of cloths to subsidiaries and result in the reduction of the future revenues of the corporation. If Pound appreciates, home sales are expected to decrease due to the foreign competition as well. Basically, increase in value of Pound will result in a decrease in both cash inflows and outflows, and adverse. (Madura, 2007)

Translation Exposure

How does this affect a wider monetary union? Subsidiaries have their own accounting records, but in reality parent fully controls the entities. Parent company has to show its own and subsidiaries’ accounts in a consolidated manner through consolidated financial statement. To do so, there is a need to translate financial statements of all subsidiaries of different currencies into reporting currency of the parent, which is Pound Sterling.

As exchange rates vary over time, the translation of the foreign entity’s accounts is exposed to exchange rate movements called translation exposure.

Insomnia plc has to translate the Euro denominated financial statements of its subsidiaries to the Pound Sterling, which is governed by the Financial Reporting Standards (FRS 23) and the International Accounting Standards (IAS 21). Assets and liabilities should be translated at the closing date; whereas income and expenses at the exchange rates at the transaction dates (average rate for the period is allowed, if reasonable).

Translation exposure does not affect the cash flow directly, but investors base their decisions on the consolidated financial statements. When in 2005 Insomnia announced that its consolidated earnings will be negatively affected by the translation exposure to Euro, investors responded very fast by selling their shares of the company, which led to decline in value of the stock by 5%.

Hedging

What is the impact of hedging on a wider monetary union? Exchange rate fluctuation exposures affect the cash flows of the entity in a direct or indirect way. The main aim of hedging is to minimize the effects and the uncertainty of the exchange rates fluctuations. Hedging may as well reduce agency costs, expected tax liability, and the cost of financial distress. Insomnia uses forward contracts to secure the exchange rate of their transactions and thus minimize the transaction exposure. For payables it negotiates the forward contract to buy foreign currency, for receivables – contract to sell foreign currency. The company, being risk averse, uses forward contracts to minimize the economic and translation exposure as well. To minimize the cost of hedging, company first calculates the net transactions exposure in each currency for each of the subsidiaries, then hedge against this balance. Additionally, company invoices the exports to its subsidiaries in the same currency in which they will pay management fees and dividends to a UK parent. It cannot be done for the transactions with the suppliers in India and Slovakia.

Effects of the UK Joining EMU on Insomnia Plc

Creating single market forming free flow of goods, capital, services and people within the European Union was the main objective of creating the EMU. To adopt Euro, countries need to fulfill “Convergence Criteria” set out by the Maastricht Treaty, but benefits outweigh the hard to accomplish objectives of price, exchange rate and fiscal stability as well as interest rate convergence and an impact on a wider monetary union.

Cost Savings on Cross-Border Transactions

Increase in trade within the European Union is one of the main objectives of the EMU. It is supposed to increase the consumption possibilities. According to Rose (2000) trade within domestic economy is far higher than international. Joining EMU and having single market with other EU countries will significantly increase the trade by making it domestic. It could be a great advantage for the Insomnia. It is thought to be achieved through cost savings on the cross-border transactions. Trading across Euro zone is much cheaper due to no need for exchanging money to foreign currency, hedging or keeping high reserves of foreign exchange. This will speed up the transactions and decrease its cost. Insomnia will benefit from this as company already trades with the subsidiaries from the Euro zone. Joining EMU will decrease costs of trading with them, whereas leaving problem of high costs of trade with India unsolved. Staying outside the EMU could be a big disadvantage in case of Pound appreciation. Shall this happen, export and sales in foreign countries will decrease as price of company’s goods will be higher. If joining EMU, Euro fluctuations would not have an effect on the exports to subsidiaries.

So far, strength of Sterling against Euro has already resulted in the reduced UK exports, which in turn forced foreign investors to pull out of the UK (Gillette, Siemens) and many more threat to pull out if UK will not adopt Euro. For the economy it is a disadvantage, but it is in favour of Insomnia plc, as it will reduce the competition. However, today’s situation is not positive for the company as “investors come here [to UK] because we have lower taxes and less regulation than the Euro-zone.” (Dominic Cummings, F/T; 12/06/01)

Stability of Prices

Stability influences monetary union, one of the advantages of joining EMU according to the European Commission is having more stable prices due to anti-inflationary regulations by European Central Bank. It is to be done by setting benchmark interest rates (according to the Fisher Effect) and exchange rate. It will affect Insomnia indirectly. In the event of the crisis in one of the EMU countries it is very possible that ECB will adjust interest rates in all other countries regardless the domestic conditions of single states. UK economy then may become unstable and collapse unfavourably affecting cash flows of the company. The risk of this happening is large due to high Euro volatility comparing to Dollar and Pound since it was introduced.

However, price stability can bring more advantages than the disadvantages to the Insomnia. Creditors being sure that prices will remain stable in the future are more willing to lend at lower interest rate which encourages domestic investments. Historically, UK interest rates have been higher than in the Euro-zone. In case of higher interest rates in the country, it may attract foreign investors in putting funds into Insomnia, but customers are more willing to save money rather than spend on clothing. Controlled inflation, stabilized prices and elimination of exchange rate fluctuations result in the ease of making long term investment decisions, planning and borrowing for Insomnia. (“Stability: Why is it important for you?”; ECB, 2009)

Price Transparency in a Monetary Union

Price transparency of a monetary union is driven by the price stability. When joining EMU, costs of the same goods across the whole Euro-zone will be much easier to compare. Prices of the Insomnia plc are relatively more expensive than the competitors, revealing it will lead customers to shift their purchases to different retailers. This might effect in the downwards pressure on prices and make it harder to keep different pricing policies on similar quality and use products. It is a big advantage for customers, but not for the Insomnia businesses. On the other hand, price transparency might help the company to find and work with the new, cheaper suppliers of clothing’s packaging. In addition, if Insomnia wants to set up a new subsidiary in the Euro-zone country, can easily compare costs of doing so among various locations. Stock prices of EMU countries are more comparable and prices are more stable as well, so it is easier and safer for the foreign investors to chose and invest in stock of Insomnia. Although, highly correlated markets decrease the diversification of the European investor.

Other Effects

Joining Euro will effect in long-term savings on the book-keeping. The Company has to hire people and keep tracks of costs, expenditures, margins etc. in various currencies. These costs will be reduced due to single currency used by the parent and subsidiaries. On the other hand, the disadvantage of one currency would be the cost of change over. This will require staff training, new tills software as well as labelling. Using Euro by UK might make company’s products more attractive to Euro zone customers due to easier purchases of goods online with no exchange rate uncertainty.

However, contrasting to the UK, in the Euro zone there is a VAT fee on children clothing, which will increase the price of such company’s items. It is a disadvantage for the clothing company. (Stephen Castle, the Independent, 15/07/03)

The level of hedging in Insomnia will be significantly decreased. Due to having Euro as a functional currency, company’s transaction exposure will be minimized drastically, due to having majority of transactions denominated in Euro. Insomnia will have to hedge only against the Indian Rupee. Economic exposure to exchange rate fluctuations will be decreased as well due to majority of the company’s operations based in the single, highly integrated market. Appreciation or depreciation of the Euro will not have an effect on the price of goods relatively to the competitors, trade or competition itself within the EMU. It will influence only trade with India and only Rupee will have to be hedged against. Translation exposure will be eliminated. As company needs to translate only the financial statements of its subsidiaries within the EMU, there is no need for this, therefore any need for hedging.

Using Euro as a Functional Currency of Insomnia Plc

“Functional currency is the currency of the primary economic environment in which the entity operates. The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash.”(IAS 21) Insomnia considers the choice of the functional currency based on the factors stated by the IAS 21:

  1. The currency: That mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled); and of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services.
  2. The currency: That mainly influences labour, material and other costs of providing goods or services (this will often be the currency in which such costs are denominated and settled).

According to the factors stated above, Insomnia should change its functional currency into Euro. The effect of this action will be similar to joining the EMU. Insomnia having Euro as a functional currency will benefit from the fixed exchange rate and reductions in cost of managing currency risk, speed of Euro transactions as well as price transparency. UK market will not be highly integrated with the Euro zone, as it would be in case of joining EMU. Insomnia would not be able to gain from the lower interest rates and stable prices. Obtaining cross-border funds will be easier when having Euro as functional currency, but due to prices being less stable, the cost of financing will be slightly higher than in the EMU. VAT on children clothing will not be introduced giving an advantage to Insomnia. Hedging will be decreased as well. Transaction exposure will be minimized, but by less than when joining EMU. There will be a need to hedge small amounts against receivables in Pounds and payables in Rupees as the majority of transactions are denominated in Euro. The company could easily reduce the exposure even more by invoicing in Euro, shifting this way the exposure down the supply chain. Economic exposure will be slightly decreased. In opinion of the report’s author, appreciation or depreciation of Euro throughout the EMU will not have an effect on the company or its competition. Although, UK will not be consistent with the single market, interest rates and inflation of the EMU zone, which may cause the differentiation in prices of the same goods (no price stability). Translation exposure will be shifted from translating from Euro to Pounds, to translation of Pounds to Euro. Exposure will be however decreased due to only 30% of revenue coming in Pounds.

On the other hand, it is argued (E. Christie; A. Marshall) that there is no connection in reduction in hedging with the decrease in risk. According to the article, the majority of UK MNCs using Euro as functional currency stated that there is no reduction in hedging. Author of the report argues with this opinion. It is probable that questioned companies had different levels of trade with the Euro zone states. Insomnia plc has its majority of operations focused within the EMU zone, therefore the advantages of reduced risk will benefit in lower incentives for hedging. Moreover, hedging policies could stay unchanged due to the different types of risk (non currency) faced by the companies. According to the article, using Euro did not encourage companies to expand internationally, which illustrates currency exchange risk as only one of the factors influencing investment decisions.

Conclusion

UK joining the EMU will bring Insomnia Plc lots of advantages. Stable prices, elimination of the exchange rate uncertainty leading to cost savings on the cross-border transactions, price transparency, possible growth, easier accessible borrowing, higher stock liquidity and decrease in hedging are just the major benefits to the company. However, there are factors which can influence the corporation in a negative way including not always favorable price transparency or additional costs of change over. Similarly, using the Euro as a functional currency involves its advantages and disadvantages, but the last have greater power than in the case of joining the EMU. It is decided that main exposures of the company involve the exchange risk; therefore reducing this uncertainty will be significantly beneficial to the Insomnia plc in the short and long term.

References

Anon, An Analysis on Whether UK Should Join the Euro

Artis, M., The call of a common currency, Europe without Currency Barriers, paper no. 3

Buckley, A., 2004. Multinational Finance. 5th ed. Edinburgh: Pearson Education ltd.

Castle, S., 2003. Britain fights EU plan for children’s clothing tax.

Christie, E., Marshall, A., 2001. The Impact of the Introduction of the Euro on Foreign Exchange Risk Management in UK Multinational Companies. European Financial Management, Vol. 7, No. 3.

Currie, D., 1997. The pros and cons of EMU

HM Treasury (1997), UK membership of the single currency: An assessment of the Five Economic Test

Rose, A.K., 1999. Does a Currency Union Boost International Trade?

International Accounting Standards. ,2009,IAS 21, The Effects of Changes in Foreign Exchange Rates

Madura, J., Fox, R., 2007. International Financial Management. London: Thomson Learning.

View Economics Dissertations Here

Oil and Gas Sector Qatar

The Impact of the Oil and Gas Sector on the Qatar Economy

Oil and Gas Sector Qatar

Qatar has become a dominant player on a global front, and its economy continues to grow at an alarmingly fast rate; it has seen a large influx of expatriates to the country because of the attractive remuneration packages on offer and the tax free environment that is available to the labor market. In addition the acceleration of growth seen in the Qatari economy is not solely due to the attractive remuneration and tax environment, but a number of other factors exist, such as the presence of large organizations, flexible trade policies, government supported initiatives and influences as well as cross border collaboration with other nations and companies that has intensified the growth of Qatar’s economy.

The production, distribution and sale of oil and gas are one of the fundamental factors that have seen Qatar and its economy develop from a frontier market status to an emerging market status. Petroleum is the cornerstone of Qatar’s economy and accounts for more than 70% of total government revenue. Paramount to this is the volume of gas which places Qatar as the third largest provider of Gas in the world today, and the richest Muslim country globally.

It is commonly becoming a place to build and implement businesses and successful partnerships and furthermore, the wealth Qatar has is in abundance which has enabled the economy of Qatar to flourish under the stewardship and vision of the Qatar emir and its government. Its economic freedom in the 2012 index was rated at 71.3 which places Qatar at 25 in terms of the freest economy of the world, and this shows the strides made by the country as a whole, however this can largely be attributed to the wealth generated from oil and gas productions, which is the largest contributor to the Qatari economy.

While Qatar has made significant progress in laying the institutional groundwork for sustained and diversified economic growth, the volatility of commodity prices, particularly during recent economic woes seen across the world which continues to undermine macroeconomic stability. Restrictions on foreign investment still exist and considerable state involvement in the economy is serious drags on generating more vibrant economic drive.

Justification of the Study

There is a lot of literature on the impacts of oil and gas on the economy of Qatar. However, most of this literature has not taken an all-round examination of the role and impact of oil and gas on the economy of Qatar. An examination of this literature shows a high inclination to the attractive economic effects of oil and gas revenue but they have paid little attention to the negative impacts of over reliance on oil and gas and its role in the current economic climate in the country.

These literature have also paid minimal attention to other factors that have contributed to the economy and the impact of globalisation. Because of this, they have been less reliable on making policy recommendations on economic diversification as a way of responding to volatility of oil prices and the global shift towards green energy supply in order to ensure a continuously high economic growth. The country also has to begin setting up economic projects that will sustain its economy, especially after the exhaustion of its oil and gas reserves. This literature gap provides the rationale for this research. Although it pays a special attention to the oil and gas industry, this research makes a whole round examination of the Qatar economy and out of this, it will make an evaluation of the role of oil and gas companies in improving the economy of Qatar.

Objectives and Nature of the Study

This study will critically evaluate and assess the role and impact of the oil and gas industries within Qatar on its economy. In doing so, the study will focus on current economic climate and analyse the key factors which contribute to the economic growth which has been evident over the last several years. The study will make a strategic evaluation of the Qatari economy examining the benefits and drawbacks of reliance upon oil and gas companies and more importantly looking at the influence of globalization on Qatar’s economy.

Main Aim

To assess the impact of oil and gas sector on the Qatari economy

Literature Review

This section of the paper contains brief summaries of the existing literature surrounding the role and impact of the oil and gas industries within Qatar on its economy and other factors that have facilitated or contributed to this the economic growth of the country.

Economic Landscape of Qatar

Qatar has flourished under the strong stewardship of the Al -Thani family and the support of the government has enabled Qatar to build and strengthen the economy of Qatar. During the recent financial crisis where many countries and governments struggled to maintain control and control spiraling debt Qatar seemed protected from such adversity, and in 2011 Qatar had the highest growth rate. Qatar’s economic policy has been focused on developing its vast oil and natural gas reserves with considerable success. The economy has seen unprecedented growth but this has largely been due to the focus and revenue generated from the oil and gas sector Qatar.

Globalization in Qatar

Globalization has encouraged and seen flexible trade among nations and also allowed emerging economies such as Qatar to prosper as it has enabled various distribution channels to be accessed. Without sufficient access to global channels or investment from foreign investors, the economy of Qatar would remain stagnant with low growth rate and a sufficiently weak economy. According to Mankiw et al (2011), international trade allows economies to achieve economies of scale, build strong relationships and more importantly, develop trade policies and practices which assist the economy.

Qatar, having reduced restrictions to some degree with respect to the investment of foreign investors, has increased its position as a leading oil and gas provider. More importantly, it has allowed Qatar to develop other aspects of its infrastructure away from the production and distribution of oil and gas. Globalization in Qatar can also be seen through the expatriate workforce, who account for almost 75% of the Qatari population, and the skills and knowledge of these individuals has allowed Qatar and its economy to benefit from sharing of best practices and gained knowledge.

Oil and Gas Companies

As mentioned in earlier parts of this chapter, the oil and gas industry in Qatar is by far the largest contributor of revenue, with almost 70% generated through this industry. The money is reinvested within the Qatari economy, with a number of objectives the government has set such as development of the infrastructure in Qatar and the knowledge base. Money is also reinvested to develop and improve other business sectors particularly the reinsurance and asset management sectors. As discussed oil and gas is a large contributor of revenue and is one of the key drivers for the Qatari economy, (Miller et al, 2011) however the volatility of oil prices, and the global focus of shifting towards more greener energy supply is likely to impact the economical standing and strength of Qatar.

Impact of Oil and Gas Industry on Qatari Economy

The exploitation of oil and gas fields in Qatar begun in 1940 and since then, the oil and gas industry has had a huge impact on the economy of Qatar. Generally, the oil and gas industry has led to the attainment of a stable economic prosperity in the country. First, it has removed Qatar out of the ranks of the poorest countries in the world. Before this, it was a poor pearl fishing nation. In relation to this, the industry has also helped to speed the economic development in the country and in 2010, Qatar was experiencing the highest growth rate in the world. This economic boost has mainly been experienced since the dramatic increase in oil and gas revenues in 1973 and the completion of first phase of the North Field gas development. This phase alone cost $1.5-billion.

This positive and accelerated economic growth in Qatar has been recorded even in the times of global financial crisis. During such times, the country experiences a rebounding of its economy due to the increased oil prices as opposed to non-oil producing countries that have to spend extra money to avail oil and gas for driving their economies. The oil and gas industry can therefore be said to provide a shield on the Qatar economy against the effects of global financial crisis. It is undeniable that the oil and gas industry is the backbone of Qatar’s economic development. This industry accounts for over 50% of the country’s GDP, about 85% of export earnings, and 70% total government revenues (Miller et al 2011).

The oil and gas industry has provided Qatar with one of the leading per capita incomes globally. Currently, Qatar has the second largest per-capita income in the world. The per capita income for 2009 was $80,000. This rose to $90,000 in 2010 and to $102,700 in 2011. The GDP for these years were $131.2 billion, $153 billion and $181.7 billion in for years 2009, 2010 and 2011 respectively. Their GDP growth rates were 12%, 16.6% and 18.7 % respectively (CIA world fact book   2012).

The oil and gas industry has also helped to reduce the unemployment rates in Qatar and currently, Qatar is one of the countries with the low unemployment rates. Unemployment rates in 2009 stood at 0.5% and remained constant through 2010. However, this figure dropped to 0.4% in 2011. Inflation rates in Qatar have been reduced mainly because of the increased government revenues from the oil and gas industry and in 2011, this figure was 2.8%. this has led to a decrease in the number of people living below poverty line. The Industries Qatar (IQ) is the second largest producer of chemicals in Middle East. The largest is Saudi Arabia’s Basic Industries Organisations.

The huge revenues from the oil and gas industry have provided sufficient capital for the establishment of heavy industrial projects in Qatar. These include refinery, fertilizer plant for ammonia and urea, petrochemical plant and a steel plant. These projects are based in Umm Said and they benefit directly from gas fuel extracted in the country. The development of industries has provided a means of diversifying the economy. Revenues from oil and gas have been critical in enhancing the development of other economic sectors like tourism, transport, education among others. Through these revenues, the government of Qatar has been able to boost its educational sector and this has reduced the reliance on foreign expatriates who are expensive to maintain.

oil and gas sector Qatar
oil and gas sector Qatar

Overall, the improved government and household income has led to a significant increase in the number of Qataris who attain higher education and those that are foreign-educated. These individuals have occupied the key positions that used to be occupied by the highly paid expatriates. This has had a positive impact in reducing national expenditure. Because of the stable income from oil and gas export, there have been sufficient funds for facilitating the growth of the tourism industry through the funding of the various activities and plans of the Qatar Tourism and Exhibitions Authority (QTEA). This has led to an increase in the number of tourists received in the country and thus revenue from tourism.

The government has also been able to expand the New Doha international airport and this is important in increasing the country’s economic growth by accommodating a larger number of passengers, especially tourists, as well as some economic commodities. Still on transport, revenues from oil and gas have helped to improve regional connectivity between Qatar and, Bahrain and Saudi Arabia through the multibillion-dollar Qatar Bahrain Causeway and the Doha Expressway. This has resulted to increased regional trade between Qatar and these countries. Others include extensive bus and rail transport that are important for facilitating a smooth running of the various economic activities like transport of human resources, raw materials or finished products to the target markets or export points.

Key Factors Driving Economies

An economy comprises of the economic systems of an area; its land resources, capital, manufacturing, production, trade, distribution, consumption patterns and labor. A country’s economy results from the activities and mechanisms that result from its technological know-how, demographic factors, geography, utilization of natural resources and history (Stretton 1999). These factors contribute to the environment, content and principles upon which the given economy operates. A market based economy may be looked at as a limited social network where exchange of goods and services takes place based on the demands and supply between the economic agents i.e. a medium of exchange where credit and debit values are accepted in a given network.  Labor and capital are the only free economic systems that can move free in search of higher profits, interests, dividends, interests, benefits and compensations. Land resource is fixed.

For an economy to be sustainable, the key drivers of its growth include, per-capita income, opens to trade, channelization of investment and deregulation (Stretton 1999). Per capita income or income per person refers to the measure of a population’s resources within a given nation or country in comparison to other nations. It involves taking the sources of income such as gross national income and then dividing it by the total population. Commonly, an international currency is used for calculation of GDP which produces accurate statistics for comparison. It’s not aimed at determining wealth or resource distribution of a nation but a measurement of success (Stretton 1999). Per capita income does not result to monetary income because income over time needs to account for change in prices. Another weakness is that there can be discrepancies on international comparisons caused by differences in living standards between nations that are not reflected on exchange rates.

Demographics refers to information that shows he populations composition on a given area. This information comprises of age, gender, income, race, population growth and migration patterns. These factors determine the price of commodities, demand and supply phases. Changes in demographics can have significant impact on the market trends of a nation. Investors need to analyze the demand and supply effects. Changes in interest rates can influence a person’s ability of purchasing an item since, if the interest rates fall, the mortgages of buying a house for example decreases and increases the demand for the house. When the interest rates rise, the mortgage increases, lowering the demand for the house.

Investment channelization affects the economy in that, if people have invested in buildings, there is sensitivity to economic activities due to the type of lease structure inherent in the business (Stretton 1999). Structures are bound to be demolished any time especially if they are located on public land. On the same note, buildings located on non-strategic business ventures are likely to yield less profits in terms of rent compared to those that are strategically located. People should be advised to invest on appreciating resources such as land as opposed to depreciating resources.

Employment is another key economic determining factor. Employed persons contribute to the economy through tax payment (Stretton 1999). Employment also improves the living standards of people in a given population. Openness to trade is determined by factors such as communication patterns between nations, political stability and history of a nation in terms of trading patterns. Communication strengthens business relations between nations. Political stability ensures freedom of movement and security in conducting trade activities.

The Key Factors Driving the Qatari Economy

EconomyWatch (2010) reports that Qatar is one of the fastest growing economies across the globe and has surpassed countries like Turkmenistan and Singapore according to 2010 economic survey 2010. The survey revealed that by 2010, Qatar’s real domestic product (GDP) growth rate stood at 19.4 percent. Its economic growth has been consistent since 2008 in which it I ranked among the top three world’s fastest growing economies. In fact, economists believe foresee the growth to continue by double-digits in the coming years. The growth is attributed to by many factors among them being producer of oil and natural gasses.

EconomyWatch (2010) argues that the growth in Qatar’s economy has mainly been spurred by the fact that it has abundant oil and natural gas. For instance, it is estimated that natural gas and oil industries contributes 50 percent of the gross domestic product, with 85% of the export earnings and the other 70% being revenue. 2010 statistics show that 76.98 billion cubic meters of natural gas was produced in Qatar which accounts for an average of 1.213 million barrels of oil production daily. Qatar also ranks among the world’s top exporters of oil. This has helped in increasing economic growth based on the fact that there is high demand for oil and constant increase in prices globally.

The other factor that has spurred economic growth in Qatar is the country’s economic diversification efforts (Oxford Business Group 2009 p.42). EconomyWatch (2010) argues that since the economic down turn experienced in Qatar in 1980s and 90s, the government has ensured that the country reduces over-reliance on natural gas and oil for economic growth ensuring that it expands the country’s service sectors such as tourism and finance industries. For instance, Qatar’s financial centre built in 2005 is a state-of-the art business and financial centre that serves major multi-national companies and international financial service organizations. This has contributed a lot to Qatar’s economic growth. With regard to tourism sectors, the country has good infrastructural facilities, ranging from good roads, hotels, and natural sceneries developed to attract tourism has contributes largely to its economic growth. The fact that it has good infrastructural facilities is what led to its successful bid to host 2022 world cup. This has also increased its global profile thus increasing tourist’s influx (Oxford Business Group 2009 p.42-88).

Qatar’s industry sectors are also another factor that has contributed considerably to its economic growth. Apart from gas and oil industries, Qatar also has other industries such as steel, fertilizer and petrochemical industries. The government in partnership with private sectors has maintained a positive growth in all this industries. For instance, Industries Qatar (IQ) ranks second largest chemical producer in the Middle East just behind Basic industry organizations in Saudi Arabia. EconomyWatch 2010 survey reports that Qatar ranked among the world’s fastest growing in terms of industries in 2010, rising by 27.1% in from the preceding year. The trend has continued to grow. Thus it is one of the major factors that contribute a lot to the economic growth in Qatar.

The growth in Qatar’s economy is also attributed to the fact that the country has invested a lot in foreign countries (Oxford Business Group 2009 p.42-88. The money recouped back from such investments is used in the development of the country’s economic stimulus such as education sectors, health and other social facilities. The country also trade a lot with other countries like Japan. This has spurred a lot its economic growth. For instance, EconomyWatch (2010) Japan was the largest export partner of Qatar which accounted for 34.68 percent of all exports from Qatar. This was followed by South Korea, Singapore and India.

The other factor considered to contribute to the growth is the modest population in Qatar. The modest population has ensured that there is no strain in economic resources of the country. This is therefore a factor that has spurred its growth in GDP per capita.

Benefits and Drawbacks on Placing Reliance on Oil and Gas Revenues

Oil and gas are the main sources of revenue to the citizens. National wealth and revenues are mainly derived from oil and gas. As a major contributor to the national economy, oil and gas le ads to growth, development and good governance.  However, oil and gas have brought several challenges to the national government. These challenges do not only include the problems of management of oil and gas resources and the taxation issues. The challenges also include the government’s ability to control resources, governance and accountability in the usage and distribution of the national revenues to all members of the country (Cordesan, 1997).

Another major challenge of relying on oil and gas is the ability to manage the environment.  Unchecked oil and gas exploration and production leads to environmental de gradation. Crucial habitats for both plants and animals can be affected while producing oil. In addition, harmful gas emissions to the environment have led to global warming thus le adding to climate change. Current efforts have been channeled toward the production of energy through renewable sources of energy. Over reliability on gas and oil also reduces the chance of the coming generation in using the resource. With the increasing demand on oil and gas and the mass production, the coming generations  are likely not to benefit from oil and gas  in the coming few years. Investing in the renewable sources of energy is the best alternative to the usage of fossil fuels.  Placing reliance on oil has also led to the decreased food production. Large tracts of land have been used in the exploration and production of oil and gas (Amuzegar, 2001).

Over-reliance in oil revenues leads to increased economic tax reliability. Other contributors to the economic sector have witnesses a decrease in the amount of taxes they can contribute to the national economy. The agricultural sector has not been such effective in contributing to the national economy. However, reliance on oil and gas revenues has led to faster economic growth in Qatar (Cordesan, 1997).

Due to the increasing rate of petroleum rents. The government has been able to decrease the amount of taxes levied on its citizens. Reduced levels of taxes ensure that the citizens enjoy larger part of their income without being highly taxed by the government. However, corruption among government officials has led to the loss of huge amount of national resources. Corruption ensures that citizens do not en joy the potential benefits of the revenues generated from oil (Amuzegar, 2001).

On the contrary, reliance on oil and gas may pose challenges to the government especially when the oil and gas are not in large amounts. Fossil fuels sources can be depleted due to its constant usage and over reliability. The government therefore needs to invest t in other contributors to the economy such as industries. This will ensure that oil and gas shortage commonly witnessed or the eminent depletion of sources lead to a crisis.  Further, there has been lack of public accountability and the rampant corruption cases. This has led to fierce competition in the elective posts with competitors using violent means to deter their opponents from taking office. Politicians have continued to use state resources and facilities; there has also been the increased violation of human rights and harassments (Cordesan, 1997).

Trade barriers and the Impact on the Economy – oil and gas sector Qatar

Internally, Qatar maintains a number of trade barriers, which directly affect foreign investors willing to invest in the country. These barriers are mainly in form of import restrictions. First, the country is extra keen on the import of politically or religiously sensitive items and the Government of Qatar (GOQ) is expected to ban the import of such products.  Just before the 1995 closure of the Arab Boycott of Israel Office which was located in Doha, the government of Qatar unilaterally deleted some giant foreign firms from the blacklist. This included some US corporations. Qatar has lifted the tertiary and secondary aspects of the boycott and the as a result, the Israeli Trade Representation Office was set up in Doha. However, in a brief statement, the government of Qatar announced that this office was officially closed. This was just before the opening of the Organization of Islamic Conference in November, 2000.

Qatar does not have import quotas. However, a number of non-tariff barriers which discourage investment and trade arise occasionally. For example, Qatar maintained a banned the importation of beef from the US from 2005 until mid-2008. International trade in Qatar is also restricted by cultural barriers. For example, the imports of pork products is totally prohibited in Qatar because of cultural reasons. The country is s strong Islamic state and the consumption of pork is totally prohibited by their religious values (Arnous 2011).

International Trade Within Qatar

Imports over the one past decade, Qatar has depended more on imports. These imports range from basic food commodities to consumer goods. Specific import goods include machinery, chemicals, and transport equipment. The Imports of goods is mainly dominated by Organization for Economic Development and Cooperation (OECD) members namely US, UK, Japan, Italy, and Germany. Others include South Korea, Saudi Arabia, France, People’s Republic of China, and the United Arab Emirates. In 2010, the total import value for Qatar was $25.33 billion (CIA World Fact Book). Although Japan overtook the UK as Qatar’s chief machinery supplier, imports from the UK still account for an important percentage of Qatar’s imports. Overall, European Union (EU) is Qatar’s leading import trade partner. The value of Qatar imports doubled since 1990 as a result of improved purchasing power resulting from increased oil and gas sales and this peaked in 1999. Since the early 1990s, the capital gas and oil purchases have accounted for approximately 40% of the total import spending in Qatar (CIA World Fact Book). Unlike the export value, Qatar’s import value is consistent or predicable due to the large difference between its import and export values. Any one time, the country has sufficient money to fund its import trade. Oil and gas has therefore played an important role in maintaining a good import trade in Qatar.

The main export product in Qatar is crude oil. However, its dominance has begun declining over the recent years as a result of the increase in the export of Liquefied natural gas (LNGs). Crude oil accounts for about 56% of Qatar’s total exports and this reliance on crude oil has resulted to inconsistency in Qatar’s export bill (Miller, Agnes, & McBrewster 2010). This value has always fluctuated, to the positive and negative, as dictated by the global oil prices. Evidently, Qatar’s export revenues begun to surge beginning from 1999. in 1998 for example, export revenues were US$4.36 billion but this increased to US$6 billion in 1999 (CIA World Fact Book). Beginning this time, Japan has been the largest export partner, of Qatar. In 1998, exports to Japan alone accounted 58.1% of Qatar’s total export bill. 2010 estimates still places Japan as Qatar’s leading export partner and its trade value accounted for 30.3% of Qatar’s exports. Other important export partners for Qatar include South Korea (13.1%), India (8%), Singapore (7.7%), UK (4.2). Thailand and the US import from Qatar but on minimal levels compared to other export trade partners. Apart from exporting oil and LNG, Qatar also exports petroleum products, steel and fertilizers. In 2010, Qatar’s total export value was $104.3 billion (CIA World Fact Book).  The substantial revenues from oil and gas have allowed Qatar to maintain a significant trade surplus. This has been efficient in shielding the country from trade imbalances.

Research Methodology

Research Approach

Saunders et al. (2007) classify research approach into two main categories; deductive or inductive approaches. This research will use both approaches, as this study will analyse existing study and theories in relation to the subject. The study will rely on secondary data with sources including books, journals, government records, newspapers and reputable websites.  Primary data will also be relied on with questionnaires being issued directly to respondents. Structured interviews will also be conducted with the aim of establishing certain facts in relation to the subject from an authority’s point of view.

Data Collection

In relation to the study, a sample of 20 respondents will be used for the study. A random sample will be drawn from a population of nationals living in the capital city of Qatar. The sample will be drawn randomly at different parts of the city as they go about their businesses. Two respondents will be draw from 10 of the main and busiest streets of the city, one from each end of the street.  The 10th person to pass by the researcher’s standing or sitting position moving toward the other end of the street will be taken as a sample.

Questionnaires will be constructed using pre-defined statements where the respondents will be asked to respond based on their level of agreement with the statement. The questionnaire will be based on the Likert style questionnaire. Specifically, a five-point Likert scale will be used to indicate the degree to which an individual respondent agrees or disagrees with statements. These will range from “strongly disagree’ at one end and at the extreme end, “strongly agree”.

Each participant will be required to complete the questionnaire presented in two languages: Arabic and English. This will help to reduce the effects of language variations and thus increase the reliability of the results. In addition interviews will also be used as an additional method of gathering data. With respect to supporting this study, the people selected for the interviews will be carefully chosen and will be selected based on their position and knowledge of the area of study. For this study, two interviewees will be considered. One interviewee will be a government official working in a ministry or department directly concerned with the harvesting and processing of oil and gas. The second interviewee will be a top official in a privately owned organization that deals with oil and gas. These personalities are chosen owing to the presumed rich knowledge of the gas and oil sector and its impact on the economy.

Data Analysis

Once the data has been collected, it will be coded on SPSS software for analysis. In order to analyze the findings and results of the study, cross tabulation and descriptive statistics will be used to determine the absence or presence, and degree of association of a relationship between any combination/pair of variables that have been selected for analysis. This method will also allow an examination of the frequencies of responses or observations that fall into specific categories. A correlation coefficient will be calculated for the purpose of expressing the relationship that exists between any two variables.

Ethical Considerations

The research does not deal with a subject that is personal and so it is unlikely to attract serious ethical issues. All the same, the research will take into consideration a number of ethical issues in its procedures. Among them is the protection of the private and statutory rights of the participants and the community being surveyed. One of the things that will be done in line with this is obtaining informed consent from the participants to avoid undue intrusion. No personal data of the respondents will be collected, and minors will not be engaged in the survey.

The research questions will be framed in a way that they will help to maintain public confidence in the entire research process. Qatar is a society that highly regards its cultural values such as human relations. Because of this, the participants, especially female participants, will be approached in a more sensitive manner to avoid suspicion, misunderstanding, or undue concerns. Any conflicting interest will also be identified and taken note of.

References

Amuzegar, J (2001) Managing the Oil Wealth: Opec’s Windfalls and pitfalls, New York, I.B Tauris.

CIA world fact book (2010) Qatar Economy 2012

Cordesan, A. (1997) Bahrain, Oman, Qatar, and the UAE: Challenges of security. New York Westview press

Crystal, J. 1995. Oil and politics in the gulf: the merchants of Kuwait and Qatar, (1st Ed), Cambridge University Press. Cambridge.

Economist Intelligence Unit (2006) Qatar. Country Report, June 2006. Economist Intelligence Unit, London, UK.

EconomyWatch (2010) Qatar Economy

Government of Qatar, Planning Council (2006) Qatar 2025 Vision, Qatar, Government of Qatar

Mankiw, G. & Taylor, P. (2011) Economics, (2nd Ed), Nelson Education.

Miller, P., Agnes. F. & McBrewster, J (2010) Qatar: History of Qatar, Politics of Qatar, Municipalities of Qatar, Economy of Qatar, Geography of Qatar, (1st Ed), Alphascript Publishing.

Oxford Business Group (2009) The Report: Qatar 2009, Oxford, Oxford University Press.

Qatar Knowledge Economy Project (2007) Qatar Knowledge Economy Project

Saunders, M., Lewis, P and Thornhill, A. (2007) Research Methods for Business Students, (4th Ed). Prentice Hall, London.

Stretton H. (1999) Economics: A New Introduction, Pluto Press.

View Economics Dissertations Here