Question

During the 2000s, many countries in the Arab world experienced significant inflows of capital from outside the region. For example, estimates put the inflow into the 21Arab Nations at around $91 billion in 2010. The UAE and Saudi Arabia have been main recipient of this capital inflow over last three decades.

1. Using a diagram of the Dubai capital markets as an example, show the effect of this inflow on the rental price of capital in Dubai and the quantity of capital in use.
2. Using the diagram of the UAE for labor market, show the effect of the capital inflow on the average wage paid to UAE workers.

Answer 1

First of all we have to understand the meaning of inflow of caiptal.When in a country large foreign investments are allowed it brings lot of foreign capital in to the country. Yhere are many reasons for this. It may the policy of libralizing economy. As country is not having sufficient capital to investment country may allow foreign compnies to invest int heir country. It will help them to increase production, GDP , per capita income and standard of living. Large inflow of foreign capital in a country may have several advantages and disadvantages.

a) Now we will see the effect of this on rental price of capital in Dubai capital market.. As there is more capital available for investment in the economy the quantity of capital will increase in the market. As a result quatity supplied of capital will be more than the quantity demanded . Here we assume that quntity demanded is reamining same . In this situation rental price of capital will go down. It is shown in the diagram.

* There may be several effects if increase in capital leads to more investment than emand for investment may rise and effects might be increase , decrese or same price be there.

2) Now the effect of large capital inflow on labour price or average wage rate. As there is more capital available in the market more investors are ready to invest. It would certainly increase the demand for labor and Quantity demanded may rise and it would bemore than Quantity supplied of labour. This qould result in increase in labour price and average wage will rise. It can be shown through the following diagram.