Economics Report: International Macroeconomy Analysis - GDP and Dubai

This economics report provides a comprehensive analysis of international macroeconomics, focusing on the Gross Domestic Product (GDP) as a measure of a nation's economic success. It critically evaluates the limitations of GDP, such as its exclusion of non-market transactions, quality of life indicators, and income inequality, arguing for a broader perspective on economic well-being. The report then examines Dubai's economic landscape, identifying the main drivers of growth over the past decade, including oil production and trade, the construction industry, and the tourism sector. It also assesses potential areas of fragility in the coming years, such as dependence on volatile oil prices and challenges in the real estate market, while highlighting the importance of economic diversification, technological advancements, and the Solow Growth Model for sustainable long-term growth. The report uses the Solow Growth model to explain the downturn in the real estate market of Dubai. The report also analyzes the challenges brought about by the introduction of VAT, higher oil prices and tightening of the monetary policy by the UAE government.

Running head: ECONOMICS
Understanding International Macro-economy
Name of the Student:
Name of the University:
Author note:

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Answer to question 1
GDP stands for Gross Domestic Product. GDP refers to the total monetary value of all the
final goods and services produced within the geographic boundary of a nation within a given
period of time, say one financial year (Heijdra 2017). GDP measures the economic health of a
nation. On the other hand, economic success often refers to the economic growth and
advancement of a country. As stated by Uribe and Schmitt-Grohé (2017), economic growth
represents the increase in the capacity of producing more goods and services within a specific
time period. However, economic success of a country depends on not only GDP, but also on
quality of life, income level, non-market transactions, sustainability, real GDP per capita, HDI,
income equality, sustainability and capital depreciation etc. (Goodwin et al. 2015). Thus, GDP
has some limitations as a measure of economic success of a nation, as it leaves out many other
aspects of economic success while focusing only on the production of goods and services. The
limitations of GDP are:
 It excludes the non-market transactions. For example, the activities that take place in the
informal sector, such as, the black market economy. These transactions are not recorded
or taxed or monitored and hence the income and output generated is not included in the
GDP calculation of a nation (Giannetti et al. 2015).
 GDP does not measure quality of life or well being of the citizens, which depends on the
standard of education, health, security, happiness and material comfort of the people.
 GDP takes into account the new investment in the capital but it does not consider the
depreciation of capital. Thus, under GDP, the capital accumulation is measured as a gross
value, but not as a net value and hence, under GDP, the overstated value of the economic

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activities are recorded, while the depreciated capital value is ignored, which is the real
value of capital accumulation.
 The HDI is not included in the GDP calculation, while the overall economic and social
development of the economy, that is, the development in health, wealth and education are
not included in the GDP.
 GDP is also not equipped with the measurement of income inequality of a country, which
also reflects the economic success of a nation. If there is high inequality in the economic
distribution of a nation, then even if GDP is high, it does not result in overall well being
of the people and hence, GDP cannot measure the economic success (Nolan, Roser and
Thewissen 2018).
 Furthermore, a country may have a higher GDP but would have a lower GDP per capita
if the population of the country is quite high. For economic success, higher per capita
GDP is required, and hence, GDP calculation does not take into account the per capita
GDP and welfare of the people (Giannetti et al. 2015).
 GDP also does not take into account the negative externalities generated from the
production and consumption activities. The costs incurred on the health of the people due
to the negative externalities, such as, pollution, are not measured in GDP (Jones and
Klenow 2016).
 GDP takes into account only the value of the production happening within the geographic
territory of the nation, and the income that is generated outside the country, such as, the
incomes and money remitted by the non-resident citizens are not calculated in the GDP.
Thus, it can be said that the calculation of GDP is not intended to measure or evaluate the
welfare or wellbeing of the citizens’ of the nation. As highlighted by Jones and Klenow (2016),

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economic success of a nation includes the total production, the growth capacity and overall
welfare of the people, while GDP calculates only the monetary value of the goods and services
produced within the geographic boundaries and not the incomes generated outside the country by
the citizens of the nation within a specific time period. It also does not measure the overall
development of the communities, that is, health, wealth, education, happiness, along with per
capita income or product, depreciated capital value, non-market transactions, income equality,
quality of life and sustainability (Balestra, Boarini and Ruiz 2018). Thus, GDP is not an indicator
of economic development and although, it is an indicator of economic health of a nation, yet it
should not be used for evaluating the economic success of a nation.
Answer to question 2
1) Dubai, a major city in the Middle East and an emirate in the UAE has transformed itself
from a fishing village to a real estate hub in the past two decades. In the UAE and Dubai,
the main three drivers of economic growth in the past 10 years are the oil production and
trade, growth in the construction industry and growth in the hospitality and tourism
sector. The oil industry is the backbone of economic growth of the GCC countries. UAE
and other GCC countries are heavily dependent on the crude oil production and trading
(Nadkarni and Heyes 2016). Due to large production, these countries have a major
influence on the oil price across the world and thus, it is one of the major drivers of
growth for UAE and Dubai. Secondly, in the non-oil GDP growth, the real estate and
construction industry has been contributing significantly in the economic growth of the

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country. Huge amount of domestic and foreign investment has helped its construction
industry to grow rapidly in the past decade (Shaikh, Worku and Rao 2017). The growth
can be seen in the remarkable constructions, such as, the tallest building in the world,
Burj Khalifa, and man-made islands and many other buildings. Lastly, the rapid and
immense growth of tourism across the UAE has benefitted the economy significantly in
terms of revenue generation, creation of employment, and infrastructural development
(Zarrouk, El Ghak and Abu Al Haija 2017). Thus, with the help of these sectors, UAE
has been able to transform its economy to one of the rapidly growing economies of the
world and become the hub of construction in the Middle East.
2) According to Saadi (2018), the growth of Dubai and for UAE will be accelerated in the
coming years on the basis of the growth of non-oil sectors. The government is taking
measures such as FDI laws to attract large amount of FDI in the non-oil sectors. The aim
is to diversify and put the focus on the development of other sectors than oil. However, it
has been found that the diversified economy of Dubai with a focus on the international
business services and tourism, has been facing tough challenges from the downturn of the
real estate market. The property prices fell significantly and the economy slowed down
by 3.1% in 2017. There has been too much investment in the real estate market and
tourism, however, according to the Solow Growth Model, a sustainable increase in the
output is possible when the capital investment is complemented with the growth in labor
and implementation of new technology. Thus, at some point of time, the marginal
productivity of the capital and labor will decline in the long run even if there is capital
accumulation, which can explain the downturn in the real estate market of Dubai. It needs
higher rate of technological progress to achieve a sustainable long term growth by

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utilizing the available capital and other resources. Furthermore, there is fall in the oil
prices since the mid 2014, which halted the economic growth of Dubai and in the coming
10 years, the volatile oil prices and strong USD will put forward challenges to the UAE
economy, as it is decreasing the external competitiveness of the Dubai economy (Diaa
2018).
Moreover, during the debt crisis of 2009 that happened due to fall in the property prices,
Dubai got a $20 billion bailout from Abu Dhabi for supporting the economy. Dubai is
still facing the impact of the debt crisis and to overcome these challenges, it should put
more focus on improving the service sectors (Azhar 2019). Tourism will continue to be a
major driver of growth in the next 10 years, as there is a huge growth in the international
tourism across the world and this is benefitting all the tourist destinations through income
and employment generation (Abbas 2019).
While the oil based industries in Dubai are getting saturated, the government of UAE
should put focus on further diversification of the economy. The event industry is bringing
a new trend of products and services in the market, which has a great potential for the
economic growth of Dubai (Sadaqat 2018). The huge amount of debt can be repaid if
there is substantial long term growth in the other sectors, which should be backed by
technological advancement. Diaa (2018) also highlighted that introduction of VAT,
higher oil prices and tightening of the monetary policy by the UAE government are some
of the obstacles for the UAE economy. Due to VAT and slower economic growth, the
level of consumer spending for different industries has been declining and inflation is
rising. The level of government spending has gone down too. Thus, lower level of
government investment coupled with job cuts is a major challenge for Dubai economy.

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