Question

The Kingdom of Saudi Arabia liberalized its stock exchange and allowed foreigners to purchase the shares traded on Tadawul (The Saudi Stock Exchange). What will be the immediate effect of this change on the

(1) GDP

(2) Productivity and

(3) Living Standard of People

in the Saudi economy? Explain and justify your answers in detail with reference to the concepts you have learned in this course so far.

ANSWER:

Answer 1

If saudi decides to liberalize it's stock market and allow foriegn investors, consequence of this action although for long run depends on countries performance and management ,in long run it is said to boost the private investors confidence.

In order to see GDP, Productivity and living standard of people get effected. We should analyze what happens when stock markets are liberalized. These are observations made in various countries once a country is liberalized. 1) Private investors confidence boost as a result an investment boom will occur , taking examples of Korea and Brazil. 2) Money flows as resultants of new investment 3) Innovation increases as due to following reasons financial constraints will be removed, risk sharing nature between global and domestic companies increases and as well as a better governance.

Although this seems to be different for different intensities of liberalization and some countries also made conditions for foriegn investors who invest equity markets to also invest in infrastructure such that technology and technological knowledge can be attained. As a country given like Saudi which have abundance of skilled labor force and also investors any such further liberalization will give country technological knowledge as well.

1) GDP is a measure total goods and services produced in a country in a year. So, a stock market liberalization which further increases the investment in the economy and also liquid capital flow to increase will thus increase the GDP of a nation.

2) Productivity Increases due to two reasons here, a) as stock market liberalization ease the restrictions on countries finance and also reduce the risk for private investors as risk is shared with foreign investors b) If conditions are kept for foriegn investors investing stock market to invest in various portifolios resulting infrastructural development. These two factors increase the productivity

3) As GDP and productivity increase, the fiscal budget will also increase and as expenditure increases, peoples welfare and their living standard too will increase