Inflation in the UAE
Section 1: Theory of inflation in the UAE
Over the past few decades, UAE was characterized by low economic growth, excessive foreign debts as well as chronic inflation to mention a few. Specifically, this region was able to go through success during those days. Since the country experience minimal growth, the rate of inflation was low with less foreign debt. Withal, in the same way, most of the countries undergone an economic crisis in the 1990s, UAE was a victim of high inflation. From a single decimal point, the rate of inflation increased in tens in a matter of few years.
The analysis of EAU inflation rate will provide orientation to deal with the present state of the economy that will predict the economic status in the future. Also, this study will enable economist to address and answer some of the questions in monetary macroeconomics. The paper will discuss the countrys current economic history and link them using various resources to a future economic position. Besides, the paper will address the impacts of high inflation over a given period. Most importantly, the paper will use a case study within the affected regions to explain the theories that will be discussed.
Causes of high inflation in UAE
Increasing housing costs have been the immediate cause of high inflation among the UAE. It is evidenced that housing and utility cost entails about forty percent of consumer expenses. On the other hand, food has been highly priced in most of the regions such as Dubai among others adding to the bucket of customers immediate expenses. These high charges have led to 0.5 percent increase in inflation as compared to last year (Ireland, n.d.). According to economic analysis, UAE is bound to experience higher inflation rates in future. Therefore, prices of houses and food should be controlled to reduce the increasing inflation.
Besides, education has been identified as another aspect that drives inflation higher among the UAE. Since schools have no idea on how to control high annual enrollments, rising school fees have resulted from increasing population. On the other hand, as the population increases, the demand of resources such as textbooks are likely to increase. It is reported that prices of books rose by forty percent as compared to last year and schools have added unreasonable bills to cater for extra finance to manage the high population (Ireland, n.d.). These have led to added high cost of life.
Additionally, the rising cost of transport is seen to push the inflation rate higher in UAE. Transport cost increased by about 6 percent as compared to August last year. This came as a result of the decision of the government to increase the prices of fuel. Based on this decision, the prices of unleaded octane increased by over 20 percent.
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Effects of high inflation in UAE
Inflation has recorded a huge impact on the economy of UAE. Contrary to the economic stability belief in UAE, high inflation brought about the contraction of standards of living. Among the impacts are not restricted to demonetization of an economy, a decline in output, depreciation of exchange rates, and an unexpected reduction of wages.
High inflation reduces balances below their maximum level; this can lead to substitutional effects in which there is a higher cost of holding monetary resources, and fewer transactions will be recorded leading to income effect. Besides, higher inflation gave rise to massive recession in UAE. GDP is seen to fall as consumption is significantly affected. It is evidenced that as inflation increases the cost of money resources, UAE reduces balances they hold. It is further notable that high inflation makes good for trade more expensive that is significant in reducing consumption demand and therefore the real exchange rate is affected. Most importantly, as inflation rate push higher, purchasing power become eroded followed by a rebound wages. These factors impact the economic stability of UAE.
Section 2: Application of the theory on case study
In this section, we assume that experience we got from high inflation in UAE can be explained by a case study about inflation on whatever the country. It is, therefore, healthy to hypothesize that any change in inflation level will have a drastic effect on an economy on a temporary basis. This section will, therefore, apply the theory learned to explain some of the aspects of high inflation such as consumption decision on household goods and the effect of the government towards high inflation among other factors.
To begin with, high inflation as per the case study and the aforementioned theory is as a result of increasing prices of household good such as food. It is evidenced that large part of the community is infested by a large number of household facilities that are used daily by people. These household items fetch utilities from goods that are traded in and those that are non-traded. It can be seen that money demands are derived from optimization of household, and therefore, consumption of such households are used to replace output as an income identifier. Besides, an increase in inflation increases the opportunity to hold money and reduce real money balances. Contrary, low balances raise costs of consumption hence consumers will look for substitutes to depend on.
To make things simple, we shall assume that the government controls all the fuel prices that may lead to increase in transportation cost, a factor of high inflation. Another factor that is controlled by the government is the domestic debt. The government finances the total expenditure of the economy, provide domestic debt, print and mint more money in the economy, and collect the costs incurred in different transactions. It, therefore, means that the government has no accrued domestic debt and stop issuing out new debts. Besides, the government has the restriction to the capital market. As a matter of fact, this aspect goes hand in hand with the case study since the aforementioned control and restriction by the government are emphasized.
It is evidenced from the case study that when tradable items are reduced, the production of such constraints remains constant. As a result of this scenario, the country export most of the tradable items and thus records trade surplus in such items . It is evidenced that when the country records trade surplus, there is a high accumulation of foreign assets and increase in earnings. However, when an economy recovers from high inflation, the country can withstand higher rate of tradable consumption.
The case study therefore successfully explain facts about inflation as can be seen in UAE. It demonstrates the actual economic level of the country, factors behind the high rate of inflation, and how economy starves from the increasing rate of inflation.
In conclusion, this paper has examined high inflation in UAE. It is evidenced that the experience in this country provides a helping hand that high inflation is fiscal and is prone to change. However, different factors such as increasing prices of household goods, food, fuel, and government intervention can lead to high rate of inflation. On the other hand, high rate of inflation in the UAE has a different impact on the economy such as demonetization of an economy, a decline in output, depreciation of exchange rates, and an unexpected reduction of wages. These factors are harmful to individuals and therefore there is the need to control them using effective methodology. Most importantly, aspects of inflations as seen among the UAE are practically identified and explained based on the case study.