The potential output describes what the economy is able to generate when entire resource including labor force, technology, natural resources, and equipment are utilized completely. It can as well describe the amount of GDP which a country can achieve upon appropriate employment of the resources (Darrat 2014). A country which is producing at potential output is operating at its full employment. It can as well mean an economic activity level whereby the AD along with AS are consistent with a stable rate of inflation.
It is utilized by people who make policies when estimating inflation, and utilize it as an output degree where an increase or decline in prices remains needless (Squalli 2012). The calculation of the rate and level of growth of potential output and consequently comparing it with outcomes with witnessed patterns will help people get the measure of spare capacity grade in economy. In this paper, such concepts as capital accumulation production function, and total factor productivity are used to showcase the level of potential output that can be accomplished by Saudi Arabia and UAE in the next 20 years and key factors.
The United Arabs Emirates practices open economy that has a greater per capita income alongside a substantial yearly trade surplus. UAE’s fruitful energies at economic divergence have declined the share of GDP anchored on gas and oil output to twenty-five percent (Darrat 2014). Right from the oil discovery in UAE over thirty years ago, the nation has gone through a prominent transformation from a penurious area of small desert princedoms to a contemporary status with a high living standard (Squalli 2012).
The government has surged expenditure on creating jobs as well as infrastructure enlargement besides opening up utilities to higher private sector engagement. The UAE’s free trade regions offering one hundred percent overseas possession alongside zero taxes thus enticing overseas investors (Squalli 2012). The strategic plan for UAE for next 20 years emphasizes economic diversification and more jobs opportunities creation for nationals via enhanced education alongside escalated sector employment (Darrat 2014).
The production function mechanism speaks to the supply side and indicates the link between factor inputs and output. Potential output is denoted by a combination of factors including inputs, capital, and labor, multiplied by total factor productivity. The Cobb-Douglas specification describes the production firm give as Yt=AtLt?-1Kt? . Yt is actual output in period t, Lt-labor employed as input, K-capital stock, A-TFP, and ?-share of capital in the national economy (Darrat 2014).
The efficiency in labor and capital utilization is linked to improvement in TFP thus leading to higher output. TFP remains observable; and calculated by taking out contribution of capital and labor to actual output. At= Yt/ tLt?-1* Kt?. This method remains the best of statistical methods because it overrides drawbacks of statistical approaches (Darrat 2014). The potential growth from the Cobb Douglas function method for Saudi Arabia is 4.5% while that of UAE is 5.6% for oil-GDP growth while the non-oil growth is 6.1% and 7.0% respectively for the next 20 years.
Capital accumulation describes the profits a company utilizes to enhance the base of its capital. It involves the acquisition of additional assets which can be utilized to establish extra wealth or which shall appreciate in value (Manama 2016). The UAE and Saudi Arabia have the potential of GDP growth basically for both non-oil potential growth and oil potential growth. Both UAE and Saudi Arabia have enjoyed sturdy growth over the previous decade due to high oil prices alongside expansionary fiscal policy by respective governments for development of economy.
Darrat, A.F., 2014. Are financial deepening and economic growth causally related? Another look at the evidence. International Economic Journal, 13(3), pp.19-35.
Manama, B., 2016, April. Economic Diversification in Oil-Exporting Arab Countries. In Annual Meeting of Arab Ministers of Finance.
Squalli, J., 2012. Electricity consumption and economic growth: Bounds and causality analyses of OPEC members. Energy Economics, 29(6), pp.1192-1205.