Principles of Macroeconomics

1. PRINCIPLES OF MACROECONOMICS (BAEC 2204)

2. Outcome No. 1:

3. LEARNING OUTCOMES At the end of the session, the student should be able to: 1. Define Economics. 2. Understand about economic problems and its concepts. 3. Define Micro and Macro Economics 4. Understand the difference between Micro and Macro Economics. 5. Explain the importance and usefulness of the study of Macro Economics

4. DEFINITION OF ECONOMICS: Economics is the study of the use of scarce resources to satisfy unlimited human wants. Economics is the science of decision making. It is the social science concerned with the allocation of limited resources. Economics studies the choices that can be made when there is scarcity. Because our resources are limited, we must sacrifice one thing for the other. 6/24/20154

5. ECONOMIC PROBLEMS The economic problem is most simply explained by the question "How do we satisfy unlimited wants with limited resources? 6/24/20155

6. CONCEPTS IN THE ECONOMIC PROBLEM Needs Are objectively Un-definable Could be wish, want or a life-saving necessity Wants Desirable goods that people wish to have. People have unlimited wants. Hence each person must take choices. 6/24/20156

7. CHOICES The economic problem fundamentally revolves around the idea of choice. Due to the limited resources available, businesses must determine what to produce first to satisfy demand. Consumers are obviously the biggest influences of this choice, as the goods which they want must also fit within their budgets 6/24/20157

8. WHAT IS SCARCITY? Occurs when the resources for producing things that people desire are insufficient to satisfy all wants Exists because human wants always exceed what can be produced with limited resources and time that nature makes available Scarcity is a situation in which resources are limited in quantity. 6/24/20158

9. THE FOLLOWING IS NOT A SCARCITY 1. It is not a shortage. 2. It exists even when we are not using all our resources. 3. It is not the same thing as poverty. 4. It occurs among the poor and among the rich. 6/24/20159

10. LIMITED RESOURCES & UNLIMITED WANTS Opportunity Cost Scarcity Choices Opportunity Cost The opportunity cost of any action is the value of what is given up because a choice was made. 6/24/201510

11. MICROECONOMICS DEFINITION Microeconomics is the study of the decisions of individual people and businesses and the interaction of those decisions in markets. Studies: Prices and Quantities Effects of Regulation and Taxes 6/24/201511

12. MACROECONOMICS DEFINITION Macro Economics Macroeconomics is the study of the national economy and the global economy Studies: Average prices and total employment, income and production Effects of taxes, government spending, budget deficit on total jobs and incomes Effects of money and interest rates 6/24/201512

13. MICROECONOMICS: ACCORDING TO PROF. BOULDING- Microeconomics is the study of particular firms, particular households, individual prices, wages, incomes, individual industries, particular commodities. The analysis of economic problems at micro level relates to the study of individual economic units. 6/24/2015 13

14. MACROECONOMICS The word macro is derived from a Greek word makro which means large. Macroeconomics is the study of the study of the entire economy. It is therefore the study of aggregate (total) income, aggregate output, aggregate demand, aggregate supply, aggregate savings and investment, total employment, general price level etc. The analysis of economic problems at macro level relates to the study of economy as a whole. 6/24/2015 14

15. DISTINCTION BETWEEN MICRO AND MACROECONOMICS: Microeconomics study deals with the behavior individual economic units. Microeconomics uses the partial equilibrium analysis. Full employment in the economy is assumed in microeconomics. Macro economics deals with the entire economy. Macro economics uses the quasi-general economic equilibrium. Full employment in the economy is not assumed in the macroeconomics. Micro Economics Macro Economics 6/24/2015 15

16. USEFULNESS OF THE STUDY OF MACROECONOMICS: The importance and the usefulness of the study of macroeconomics can be studied under the following heads: 1. Helps in formulation of economic policies. 2. Helps in understanding the Economic Systems. 3. Helps in understanding National Income Concept. 4. Helps in the formulation of Theory of Economic Development. 5. Helps in controlling inflation and Deflation. 6. Helps in International Comparisons. 6/24/201516

17. Outcome No:2

18. LEARNING OUTCOMES At the end of the session, the student should be able to: 1. Define Price level and National Income. 2. Understand the three approaches for measuring national income 3. Understand the methods of measuring national income 4. Understand the problems in calculation of national income 5. Understand the importance of national income. 6. Understand the concepts of national income

19. DEFINITION: PRICE LEVEL A price level is a measure of overall prices for some set of goods and services, in a given region during a given interval of time. 6/24/2015 19

20. DEFINITION: NATIONAL INCOME According to J.M. Keynes, National Income is the money value of all goods & services produced in a country during a year. 6/24/2015 20

21. APPROACHES OF MEASURING NATIONAL INCOME Value-Added Approach-Each firms contribution to total output is its value added, which is the gross value of the firms output minus the value of all intermediate goods and services that it uses. Intermediate products are outputs of some firms that are used as inputs by other firms. Final products are outputs that are not used as inputs by any other firms. The total value added produced in the economy is called Gross Domestic Product (GDP). GDP is a measure of all final output that is produced in the economy. 6/24/2015 21

22. APPROACHES OF MEASURING NATIONAL INCOME Expenditure Approach Add different Categories of expenditures by households, firms and government together plus the income from exports. Y = NI = GDP = C+I+G+(X-M) C = Consumer Expenditure I = Investment Expenditure G = Government Expenditure X = Exports, M= Imports. (X-M= Net Exports) 6/24/2015 22

23. APPROACHES OF MEASURING NATIONAL INCOME Income Approach Add Value Added by all firms together. Sum of value added by all firms = Wages + rents + interests + profits Equilibrium Level: Equilibrium in a economy will occur when the total expenditure for all good & services equals the total income (Output) 6/24/2015 23

24. OTHER WAYS OF DEFINING INCOME Gross national product (GNP) is the total income earned by a nations permanent residents (called nationals). It differs from GDP by including income that our citizens earn abroad and excluding income that foreigners earn here. Net National Product (NNP) is the total income of the nations residents (GNP) minus losses from depreciation. Depreciation is the wear and tear on the economys stock of equipment and structures NNP = GNP - Depreciation 6/24/2015 24

25. OTHER WAYS OF DEFINING INCOME Personal income(PI) is the total income of households. Personal income is the income received by households after paying social insurance taxes but before paying personal income taxes. The current income received by persons from all sources Wages, salaries, proprietors incomes, rental income, interest income, dividend income, and transfer payments. Disposable Personal Income (DPI) is personal income minus income (personal) tax. Disposable Income is what people have readily available to spend. DPI = PI Personal Taxes 6/24/2015 25

26. CIRCULAR FLOW OF INCOME 6/24/2015 26

27. MEASUREMENTS METHODS OF NATIONAL INCOME 1) Income Approach (method): In this method, GDP is measured as the total income from all economic activities. (Income from employment and income from profit, income from land, income from capital) GDP = rent + wages + interest + profit 2) Expenditure Approach: In this method, GDP is measured, by adding all types of spending on final goods and services. (Personal consumption + Investment + Government expenditure + Trade balance) . 6/24/2015 27

28. MEASUREMENTS METHODS OF NATIONAL INCOME 3) Output Approach: In this method, GDP is measured as the total value of all final goods and services produced by all sectors in one year. (agricultural sector output + industrial sector output + service sector output) 4)Value Added Method: In this method, the value of final goods and services are not added. We count the value added at every stage of production. And then sum up the total value of output produced 6/24/2015 28

29. EXAMPLES FOR VALUE ADDED METHOD A farmer produced wheat and its value: R.O. 100. This is the first stage. A flour mill buys this wheat and sells this to a trader for R.O. 180. Value added at second stage is R.O. 80. The trader sells this to a bakery for R.O. 270. Value added at third stage is R.O. 90. The bakery uses this flour and produces bread and sells this to retailers for 400. Value added at this stage is 130. Total value added ils : 100 + 80 + 90 + 130 = 400 We should not calculate like 100 + 270 + 400 + 900 R.O. This is wrong calculation. 6/24/2015 29

30. THE FOLLOWING TABLE SHOWS THE TRANSACTIONS OF EACH BUSINESS DURING A YEAR OrangeInc Transactions Wages paid to OrangeInc employees $ 15,000 Taxes paid to government 5,000 Revenue received from sale of oranges 35,000 Orange sold to Public 10,000 Orange sold to JuiceInc 25,000 JuiceInc Transactions Wages paid to JuiceInc employees $ 10,000 Taxes paid to government 2,000 Oranges purchased from OrangeInc 25,000 Revenue received from sale of Orange juice 40,000

31. What is the total value, measured in dollars, of the economic activity generated by these two businesses? The product approach, Income approach, and Expenditure approach are three different ways of arriving at the answer to this question; all yield (produce) the same answer.

32. 1. PRODUCT APPROACH Calculation of GDP: Value created by OrangeInc = $ 35,000 Add: the value created by JuiceInc = $ 15,000 ($ 40,000 - $ 25,000) The total value added in the economy $ 50,000 (GDP) = $ 50,000

33. 2. THE INCOME APPROACH Calculation of GDP Formula: Wages (employees) +rents + interest + profit (owners profit before tax)

34. CALCULATION OF GDP IN INCOME APPROACH Wages of employees in OrangeInc Wages of employees in JuiceInc Total Wages Add : Profit of the owner of OrangeInc (before tax) ($35,000 - $15000) Add : Profit of the owner of JuiceInc (before tax) [$40,000 (25,000 + 10,000 )] Total Profit GDP=(Wages + Profit) GDP = $50,000 (As per income approach) $15,000 $10,000 $20,000 $ 5,000 $25,000 $25,000 $50,000

35. 3.EXPENDITURE APPROACH Consumer Expenditure in OrangeInc (sold to public is a consumer expenditure) Add: consumer expenditure in JuiceInc (revenue received is a consumer expenditure) GDP GDP = $ 50,000 as per expenditure approach $ 10,000 $40,000 $50,000

36. PROBLEMS OF CALCULATION OF NATIONAL INCOME: 1)The Problem of Double Counting: In national income calculation, only the value of final goods and services is calculated. Many goods go through many stages before reaching market. Example: wheat changed into bread. In this case only the value of bread be calculated in the National Income. Calculating the value of wheat and the value of bread will be double counting. 2) The Problem of Transfer Payments: An example of transfer payments is pension. The receiver of pension does not produce anything for this money. So this transfer payment should not be included in the National Income calculation. 6/24/2015 36

37. PROBLEMS OF CALCULATION OF NATIONAL INCOME: 3) Problems Arising from the Arbitrary Definition of Income: Service rendered by housewives is not included in national income. But if the same services are done by another servant maid; it is calculated in national income. 4) Problems of Self-Consumed Production: Ahmed produces dates. He does not sell these dates in the market. But these dates are used for his family. In this example, the value of the date is not calculated in national income because these dates are used for self consumption. 6/24/2015 37

38. PROBLEMS OF CALCULATION OF NATIONAL INCOME: 5) Problems of Barter Economy: When goods are exchanged for goods, such transactions are not included in national income. For example the value of opium, bought and sold in black market is not calculated in national income. 6/24/2015 38

39. IMPORTANCE OF THE STUDY OF NATIONAL INCOME The government in formulating various economic policies to speed up economic growth uses National Income data. NI is an important economic indicator of the level of economic growth. The rate of economic growth can be compared for two different periods. The magnitude of national income decides the economic welfare of the country. 6/24/2015 39

40. IMPORTANCE OF THE STUDY OF NATIONAL INCOME NI gives an idea of the contribution of the various sectors. How the national income is distributed among the various sections of the people can also be studied from NI. NI also gives ideas about the level of consumption, saving and investment in the Country. NI data of different countries can be used for the international comparisons. 6/24/2015 40

41. CONCEPTS OF NATIONAL INCOME 1) Gross National Product (GNP): Gross National Product is the total value of output produced by land, labour, capital and entereprise supplied by the countrys nationals. These nationals may be located in the country or outside. Example: income produced by Omanis working in U.S.A. is included in GNP. 41

42. CONCEPTS OF NATIONAL INCOME The income of expatriates working in Oman is excluded in GNP. Equation of GNP in an open economy GNP= C + I + G + (X M ) + (R P) In this equation, C = Value of Consumer Goods I = Value of Investment Goods (Machines) G = Value of Government Services X M = Exports Imports R P = Net Income earned from foreign countries R = Receipt of the Government P = Payments made by the Government 6/24/2015 42

43. CONCEPTS OF NATIONAL INCOME Equation of GNP in a closed economy GNP = C + I + G In this equation, C = Consumer Goods I = Investment Goods (Machines) G= Value of all Government Services 6/24/2015 43

44. CONCEPTS OF NATIONAL INCOME 2)Gross Domestic Product (GDP): Gross Domestic Product is the value of total goods and services produced within Oman by Nationals and foreign supplied resources. Example: Goods produced by Japanese factory in Oman is a part of Omans GDP. Income of Omanis working in other countries in excluded in GDP. 6/24/2015 44

45. CONCEPTS OF NATIONAL INCOME 3) Net National Product at market prices (NNP): NNP = GNP Depreciation 4) NNP at factor cost: NNP at factor cost = NNP at market prices - indirect taxes + subsidies 5) Personal Income ( PI ): Personal Income is the income received by individuals. 6) Disposable Income ( DI ): Disposable Income is personal income minus income taxes 6/24/2015 45

46. PRACTICAL QUESTION FOR MACRO ECONOMICS (OUTCOME 2) 1) Find out the value of NNP at market price & NNP at factor cost from the following data? 1. GNP is 30000 RO 2. Depreciation is 2000 RO 3. Subsidy is 5000 RO 4. Indirect tax is 1000 RO 5. Export Import is 700 RO 6/24/2015 46

47. NNP AT MARKET PRICE AND FACTOR PRICE (SOLUTION) NNP at Market price NNP=GNP Depreciation NNP=30000 2000 NNP=28000 NNP at Factor price NNP=NNP Indirect Tax + Subsidies NNP= 28000 1000 + 5000 NNP= 32000 6/24/2015 47

48. PRACTICAL QUESTION FOR MACRO ECONOMICS (OUTCOME 2) 2) Find out the value of GNP at market price & GNP at factor cost from the following data? 1. NNP at factor cost is 30000 RO 2. Depreciation is 3000 RO 3. Subsidy is 1000 RO 4. Indirect tax is 2000 RO 5. Export Import is 4000 RO 6/24/2015 48

49. GNP AT MARKET PRICE AND FACTOR PRICE (SOLUTION) GNP at Factor cost GNP=NNP + Depreciation GNP=30000 +3000 GNP=33000 GNP at Market price GNP=GNP(FC) + Indirect Tax Subsidies GNP= 33000+2000 1000 GNP= 34000 6/24/2015 49

50. PRACTICAL QUESTION FOR MACRO ECONOMICS (OUTCOME 2)- 3)From the following data- (If closed economy means(C+I+G) & open economy means (C+I+G) + (X-M) 1. GDP in closed economy is 50000 RO 2. Depreciation is 4000 RO 3. Subsidy is 10000 RO 4. Indirect tax is 5000 RO 5. Export Import is 1000 RO Find out the value of the followings value- a) GDP in open economy b) GNP at market price c) GNP at factor cost d) NNP at market price e) NNP at factor cost 6/24/2015 50

51. A. GDP in open economy GDP= (C+I+G) + (X-M) GDP = 50000 + 1000 GDP = 51000 B. GNP at market price GNP mp= C + I + G + (X M ) + (R P) GNP mp= 50000 + 1000 + 0 GNP mp= 51000 6/24/2015 51

52. C. GNP at factor cost GNP fc = GNP mp Indirect tax + subsidies GNP fc = 51000 5000 + 10000 GNP fc = 56000 D. NNP at market price NNP mp= GNP mp Depreciation NNP mp= 51000 4000 NNP mp=47000 E. NNP at factor cost NNP fc = NNP mp Indirect tax + subsidies NNP fc = 47000 5000 + 10000 NNP fc = 52000 6/24/2015 52

53. PRACTICAL QUESTION FOR MACRO ECONOMICS (OUTCOME 2)- 4. Depending on the available figures down , calculate GNP and GDP. Income of Omani inside Oman R.O. 10,000 Income of Omani Outside Oman R.O. 6,000 Income of foreigners inside Oman R.O. 5,000 6/24/2015 53

54. GNP = Omanis income inside Oman + Income of Omani people working in all other Countries (Not including income of foreigners working inside Oman) GNP = R.O. 10,000 + R.O. 6,000 GNP= R.O. 16,000 GDP = Omanis income inside Oman + Other nationalities income inside Oman GDP = O.R. 10,000 + O.R. 5000 GDP = O.R. 15000 6/24/2015 54

55. Outcome No. 3:

56. LEARNING OUTCOMES At the end of the session, the student should be able to: 1. Understand the determinants of National Income. 2. Understand Model economy. 3. Understand the Determination of Equilibrium level of income and output with diagram.

57. INTRODUCTION J.M. Keynes analyzed the important determinants of national income. According to Keynes, the level of aggregate demand (Total demand) is the most important determinant (factor) of national income. Therefore, the higher the level of aggregate demand: higher the level of national output, national income and employment. The lower level of aggregate demand lower the level of national output, national income and employment.

58. MODEL ECONOMY To examine this relationship between aggregate demand, output, income, and employment, we make use of two simple model of the economy. First Model : We assume there are only two sectors in this model economy (only households and firms) no Government, no Exports and savings.

59. NOTES: 1. In the real world Government plays an important role in determining the level of economic activity. 2. All countries exports and import goods and services. Some households buy goods and services from other countries (imports). Their income does not flow to domestic market. These are leakage of income from the circular flow. (-) 3. Some goods and services are exported. Exports bring money from other countries. So exports are injections of money into the circular flow of income (+)

60. 4.If exports are more than imports, there will more income in the country. (Expansionary effect on income) 5. Similarly, if imports are more than exports , there will be depressing effect on income of the country. 6. Exports and imports may be treated in the same was as investment and savings.

61. DETERMINATION OF EQUILIBRIUM LEVEL OF INCOME First Equation : Expenditure = Output (Income) The national output or national income will be in equilibrium, when Total Planned Expenditure = Output actually produced

62. THE TOTAL PLANNED EXPENDITURE CONSIST OF THE FOLLOWING : Total expenditure on national output = C + I + G + (X M) C = Consumers spending on goods and services I = Investments (Firms spending on capital goods) G = Government spending on goods and services X = Exports (+) we must add the value of exports M = Imports (-) we must minus the value of imports When we calculate how much money is spend on national output, we have to add the value of exports and minus the value of imports. So planned expenditure on the national output = C + I + G + (X-M)

63. When the national output (income)= Total planned expenditure, the economy is in equilibrium. The value of national output is equal to the national income (National Output = National Income ) The economy will be in equilibrium when, Y (National Income) = C + I + G + (X-M)

64. EQUILIBRIUM LEVEL OF INCOME AND OUTPUT (DIAGRAM) Y Planned Expenditure O X Y National Income

65. In the above diagram: 1. National Income is in equilibrium at OY level of national income 2. When all output produced is sold, there is no need for producers to change their output.

66. SECOND EQUATION LEAKAGES = INJECTIONS If leakages = injections --- Economy will be in equilibrium (The circular flow of income will be stable (equilibrium)

67. In an economy with a government and a foreign sector, it is not necessary condition for equilibrium, because savings may not be equal to investments. Exports may not be equal to imports. So the national economy will be in equilibrium, when:

68. TOTAL PLANNED LEAKAGES = TOTAL PLANNED INJECTIONS S + T + M = I + G + X Leakages are: S is Savings T is Taxes M is Imports Injections are: X is Export I is Investment G is Government Spending Note: If savings are more than Investments, it can be adjusted by more government spending or more exports.

69. DEFINITION: EQUILIBRIUM GDP Total production and total income must be equal. The definition of equilibrium in the margin tells us that the economy cannot be in equilibrium when total spending exceeds production because falling inventories demonstrate to firms that their production and pricing decisions were not quite appropriate. 6/24/2015 70

70. DEFINITION: EQUILIBRIUM GDP The equilibrium level of GDP on the demand side cannot be one at which total spending because of the following reasons: exceeds output because firms will notice that they are depleting their inventory stocks. Less than output because firms will not allow inventories to pile up. Firms might decide to decrease production or cut prices in order to stimulate demand. 6/24/2015 71

71. DETERMINATION OF EQUILIBRIUM LEVEL OF INCOME Thus for equilibrium level in the economy, following two equations are to be satisfied First Equation Total Expenditure = Total Income (Output) Expenditure = C + I + G + (X-M) C = Consumers Spending I = Investments G = Government Spending (X-M) = Net Exports 6/24/2015 72

72. DETERMINATION OF EQUILIBRIUM LEVEL OF INCOME Using the last slide equation, calculate the total planned expenditure on the national output. When the national income (output) is equal to the total expenditure, then the economy is said to be in equilibrium. The Economy will be in equilibrium when, NI=Y = C+ I+G+(X-M) 6/24/2015 73

73. DETERMINATION OF EQUILIBRIUM LEVEL OF INCOME Second Equation Leakages = Injections S+T+M = I+ G+ X If leakages = injections, Economy will be in equilibrium Leakages are Injections are 1. Savings (S) 1. Investments (I) 2. Taxes (T) 2. Government (G) 3. Imports (M) 3. Exports (X) Note: If savings are more than investments, it can be adjusted by more government spending or more exports. 6/24/2015 74

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77. 6/24/2015 78 OUTCOME NO. 4:

78. LEARNING OUTCOMES At the end of the session, the student should be able to: 1. Understand the Advantages and Limitations of GDP. 2. Understand GDP and its elements added in GDP. 3. Understand the facts about GDP. 4. Understand the shortcomings of GDP

79. ADVANTAGES OF GROSS DOMESTIC/NATIONAL PRODUCT 6/24/201580 Gross Domestic Product (GDP) is an economic measure of a nation's total income and output for a given time period (usually a year). Economists use GDP to measure the relative wealth and prosperity of different nations, as well as to measure the overall growth or decline of a nation's economy.

80. LIMITATIONS OF GDP 6/24/201581 Only market activity is included in GDP GDP places no value on leisure. Bads as well as Goods get counted in GDP. Ecological costs are not netted out of the GDP.

81. GDP IS THE SUM OF THE FOLLOWING ELEMENTS: 6/24/201582 Total domestic consumption: Total domestic investment expenditures Government expenditures Net exports

82. GDP IS THE SUM OF THE FOLLOWING ELEMENTS: 6/24/201583 Total domestic consumption: This is the total amount spent on domestically produced final goods and services. Final goods are items that will not be resold or used in production within the next year milk, cars, bow ties, and so on.

83. GDP IS THE SUM OF THE FOLLOWING ELEMENTS: 6/24/201584 Total domestic investment expenditures: This measurement includes not only investments in stocks and bonds, but also investments in equipment such as bulldozers, computer servers, and commercial buildings that will be useful over a long period of time. It also includes inventory goods final goods waiting to be sold that a company still has on hand.

84. GDP IS THE SUM OF THE FOLLOWING ELEMENTS: 6/24/201585 Government expenditures: This includes everything from paying military salaries to building roads and maintaining monuments, but does not include welfare and social security payments.

85. GDP IS THE SUM OF THE FOLLOWING ELEMENTS: 6/24/201586 Net exports: Net exports is the total of goods and services produced domestically and sold to foreigners minus goods and services produced by foreigners but sold domestically (imports).

86. FACTS ABOUT GDP 6/24/201587 Using GDP as a measure of a nation's economy makes sense because it's essentially a measure of how much buying power a nation has over a given time period. GDP is also used as an indicator of a nation's overall standard of living because, generally, a nation's standard of living increases as GDP increases.

87. SHORTCOMINGS IN USING GDP 6/24/201588 GDP doesn't count unpaid volunteer work: GDP doesn't take into account work that people do for free, from an afternoon spent picking up litter on the roadside to the millions of man-hours spent on free and open source software (such as Linux). In fact, volunteer work can actually lower GDP when volunteers do work that might otherwise have gone to a paid employee or contractor.

88. SHORTCOMINGS IN USING GDP 6/24/201589 Disasters can raise GDP: Wars require soldiers, oil spills require cleanup, and natural disasters require health workers, builders, and all manner of helping hands. Rebuilding after a disaster or war can greatly increase economic activity and boost GDP.

89. SHORTCOMINGS IN USING GDP 6/24/201590 GDP doesn't account for quality of goods: Consumers may buy cheap, low-quality, short-lived products repeatedly instead of buying more expensive, longer-lasting goods. Over time, consumers could spend more replacing cheap goods than they would have if they had bought higher-quality goods in the first place, and GDP would grow as a result of waste and inefficiency.

90. OUTCOMES NO: 5

91. LEARNING OUTCOMES At the end of the session, the student should be able to: 1. Understand the equilibrium of national income when the price level changes. 2. Understand the reasons for the change in price level.

92. WHAT HAPPENS TO THE EQUILIBRIUM NATIONAL INCOME WHEN THE PRICE LEVEL CHANGES? A change in the price level have an effect on consumption C, and on net exports (X-M) which in turn affect Aggregate Expenditure. Thus, the equilibrium will change. I. Change in Consumption An increase in domestic price level lowers the real value of wealth or income which in turn decreases consumption 6/24/201593

93. WHAT HAPPENS TO THE EQUILIBRIUM NATIONAL INCOME WHEN THE PRICE LEVEL CHANGES? II. Change in Net Exports When domestic price level rises, then domestic goods become more expensive relative to foreign goods. Therefore, Domestic consumers will buy less of domestic goods and more of foreign goods, so imports will rise. Foreign countries will reduce their purchases of our domestic goods so exports will decrease and as a result Net Exports ( X- M ) will fall. 6/24/201594

94. REASONS FOR THE CHANGE IN PRICE LEVEL: 1. Change in Prices of Inputs If prices of inputs rise... Cost of production will rise.. profit will decrease, therefore, for the same output to be produced, an increase in the price level is required, otherwise firms will cut production If prices of inputs fall it will have the opposite effect 6/24/201595

95. REASONS FOR THE CHANGE IN PRICE LEVEL: 2. Increase in Productivity If labor productivity rises .. Unit cost of production will fall as long as the wage rate does not rise sufficiently to offset the productivity rise If labor productivity falls it will have the opposite effect 6/24/201596

96. 6/24/2015 97 OUTCOME NO. 6:

97. LEARNING OUTCOMES At the end of the session, the student should be able to: 1. Understand the meaning of Fiscal policy 2. Understand the types of fiscal policy. 3. Understand the methods of funding. 4. Understand the taxes and its types.

98. FISCAL POLICY 6/24/201599 Fiscal policy refers to decisions made by the government regarding its spending, taxation and benefit policies. Fiscal policy refers to the overall effect of the budget outcome on economic activity.

99. FISCAL POLICY 6/24/2015100 In economics, fiscal policy is the use of government spending and revenue collection to influence the economy. Fiscal policy can be contrasted with the other main type of economic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money. The two main instruments of fiscal policy are government spending and taxation.

100. PLANNING EXPANSIONARY FISCAL POLICY 6/24/2015101 Three ways to raise GDP: Raising government purchases Reducing taxes Increasing transfer payments

101. 6/24/2015102

102. TYPES OF FISCAL POLICY 6/24/2015103 A neutral type of fiscal policy implies a balanced budget where G = T (Government spending = Tax revenue). Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.

103. TYPES OF FISCAL POLICY 6/24/2015104 An expansionary type of fiscal policy involves a net increase in government spending (G > T) through rises in government spending or a fall in taxation revenue or a combination of the two. This will lead to a larger budget deficit or a smaller budget surplus than the government previously had. Expansionary fiscal policy is usually associated with a budget deficit.

104. TYPES OF FISCAL POLICY 6/24/2015105 A contractionary fiscal policy (G < T) occurs when net government spending is reduced either through higher taxation revenue or reduced government spending or a combination of the two. This would lead to a lower budget deficit or a larger surplus than the government previously had. Contractionary fiscal policy is usually associated with a surplus.

105. 6/24/2015106 Changes in the level and composition of taxation and government spending can impact on the following variables in the economy: 1. Aggregate Demand 2. The pattern of resource allocation 3. The distribution of income.

106. METHODS OF FUNDING 6/24/2015107 Governments spend money on a wide variety of things, from the military and police to services like education and healthcare, as well as transfer payments such as welfare benefits.

107. METHODS OF FUNDING 6/24/2015108 Transfer payments are not direct monetary payments but provide free or subsidised goods and services, such as health care and education.

108. METHODS OF FUNDING 6/24/2015109 This expenditure can be funded in a number of different ways: Taxation Seignorage, the benefit from printing money Borrowing money from the population, resulting in a fiscal deficit. Consumption of fiscal reserves. Sale of assets (e.g., land). Seigniorage /senjrd/, also spelled seignorage or seigneurage (from Old French seigneuriage "right of the lord (seigneur) to mint money"), is the difference between the value of money and the cost to produce and distribute it.

109. TAXATION 6/24/2015110 Taxes are charges levied on individuals and organization in an economy. Taxation is used to achieve the following To raise revenue to finance government spending. To influence firms or household behaviour.

110. 6/24/2015111

111. TYPES OF TAXES 6/24/2015112 Direct taxes: These taxes are placed on households income and firms profit Income tax (this is paid on employee's income) Corporation tax (this is paid on firm's profit) Inheritance tax (this is paid when you inherit income and assets) Capital gains tax (this is paid when you sell an asset) National insurance tax (these are payments made by individuals and their employers to finance pensions and securities)

112. TYPES OF TAXES 6/24/2015113 Indirect taxes: These are incurred when items are purchased. The producer is obliged to pay these taxes but adds them onto the price so as to pass them on to the customer. Value added tax (this is paid when goods and services are bought) Excise duties (these are specific taxes paid on particular goods such as alcohol etc) Custom duties (these are taxes paid on imports into the country)

113. FUNDING THE DEFICIT AND CONSUMING THE SURPLUS 6/24/2015114 Funding the deficit A fiscal deficit is often funded by issuing bonds, Shares. These pay interest, either for a fixed period or indefinitely. Consuming the surplus A fiscal surplus is often saved for future use, and may be invested in local (same currency) financial instruments, until needed. When income from taxation or other sources falls, as during an economic slump, reserves allow spending to continue at the same rate, without incurring a deficit.

114. FISCAL AND MONETARY POLICY 6/24/2015115 Economic policy-makers are said to have two kinds of tools to influence a country's economy: fiscal and monetary. Fiscal policy relates to government spending and revenue collection. For example, when demand is low in the economy, the government can step in and increase its spending to stimulate demand. Or it can lower taxes to increase disposable income for people as well as corporations.

115. FISCAL AND MONETARY POLICY 6/24/2015116 Monetary policy relates to the supply of money, which is controlled via factors such as interest rates and reserve requirements (CRR) for banks. For example, to control high inflation, policy-makers (usually an independent central bank) can raise interest rates thereby reducing money supply.

116. DIFFERENCE BETWEEN FISCAL AND MONETARY POLICY 6/24/2015117 1) Definition Fiscal Policy is the use of government expenditure and revenue collection to influence the economy. Monetary Policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.

117. DIFFERENCE BETWEEN FISCAL AND MONETARY POLICY 6/24/2015118 2) Principle Fiscal Policy Manipulating the level of aggregate demand in the economy to achieve economic objectives of price stability, full employment, and economic growth. Monetary Policy Manipulating the supply of money to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment.

118. DIFFERENCE BETWEEN FISCAL AND MONETARY POLICY 6/24/2015119 3) Policy-maker Fiscal Policy Government (e.g. U.S. Congress, Treasury Secretary) Monetary Policy Central Bank (e.g. U.S. Federal Reserve or European Central Bank) 4) Policy Tools Fiscal Policy Taxes; amount of government spending Monetary Policy Interest rates; reserve requirements; open market operations;

119. 6/24/2015 120 OUTCOME NO. 7:

120. LEARNING OUTCOMES At the end of the session, the student should be able to: 1. Understand the conceptual definition of money 2. Understand the role of money. 3. Understand the nature of money. 4. Explain how money creates a hierarchical society. 5. Understand money is it a best social measurement system. 6. Explain how the quantity of money is measured. 7. Understand the advantages of the current hard currency monetary system offered to the society. 8. Understand the weakness of money in terms of social measurement system.

121. DEFINITION OF MONEY 6/24/2015122 A first definition of money - as the mean of exchange between individuals. In a capitalist economy, this is a too simple definition. The fundamental purpose of money is a way to distribute the ownership in the society. And, by a consequence, money is also used as a mean of exchange.

122. CONCEPTUAL DEFINITION OF MONEY 6/24/2015123 Under Monetary exchange, people trade MONEY for goods when they purchase something and they trade goods for money when they sell something but they do not trade goods directly for other goods. Commodity Money is an object in use as a medium of exchange but which also has a substantial value in alternative uses.

123. CONCEPTUAL DEFINITION OF MONEY 6/24/2015124 Fiat Money - is money that is decreed as such by the government. It is of little value as a commodity but it maintains its value as a medium of exchange because people have faith that issuer will stand behind the pieces of printed paper and limit their production.

124. ROLE OF MONEY 6/24/2015125 1. Medium of exchange 2. Common measure of value 3. Standard of deferred payments 4. Means of payments 5. Unit of account standard unit for quoting prices. 6. Store of value example: Farmer Johns corn sales bring in more value than he wants to spend right away, he might find it convenient to store the difference temporarily in the form of money.

125. NATURE OF MONEY 6/24/2015126 The most obvious way to trade commodities is not by using money but by BARTER a system in which people exchange one good directly for another. Money greases the wheels of exchange and thus makes the whole economy more productive.

126. MONEY: GREEDINESS OR GENEROSITY ? 6/24/2015127 Greediness: wishing to have more and more money Generosity: willingness to give money

127. MONEY: GREEDINESS OR GENEROSITY ? 6/24/2015128 Money is considered to be the tool of greedy people. Good people are supposed to work (or sell) freely. If follow, this contest should lead to the suppression of money. So, the question is "Why money has been created ?" If you consider the money in the antic world, money was a way to take in account action of individual in order to guarantee an equivalent action.

128. HOW DOES MONEY CREATE A HIERARCHICAL SOCIETY ? 6/24/2015129 People who have no money, should work for other people. And between people who has no money some will have money to create small business as restaurant as other people will be in position to create a big factory. In society socially regulated by money, it is socially needed that some people have an huge amount of money otherwise there will never have industrial investment.

129. MONEY: IS IT THE BEST SOCIAL MEASUREMENT SYSTEM? 6/24/2015130 Money is the most sophisticated social measurement system uses in our days. It has played a major role in the industrialization of our society and in the development of our economy. Its major success is that undeveloped countries which adopts a western style banking system has managed a strong development while others stay underdeveloped.

130. MONEY: IS IT THE BEST SOCIAL MEASUREMENT SYSTEM? 6/24/2015131 However, despite this success, money is still strongly contest everywhere in the world. Many of this contest came to see mainly money as a tool of exchange which is a half false view, money is before all tool of social development and hierarchisation which has made industrialization possible. Another view is to consider that at the age of computerization. Money is may be too simple system to be optimum ?

131. HOW THE QUANTITY OF MONEY IS MEASURED? 6/24/2015132 M1 the narrowly defined money supply usually abbreviated M1 is the sum of all coins and paper money in circulation plus certain checkable deposit balances at banks and savings institutions. M1 = n + c n= Number of all coins and paper money in circulation c= checkable deposit

132. HOW THE QUANTITY OF MONEY IS MEASURED? 6/24/2015133 M2 the broadly defined money supply usually abbreviated M2 is the sum of all coins and paper money in circulation plus all types of checking account balances plus most forms of savings account balances plus shares in money market mutual funds. M2= M1 + near monies or quasi money (non checkable deposits + money market deposit accounts + time deposits) M 2 = M 1 + Non checkable saving accounts + MMDAs + Time deposits M3 - A measure of the money supply; M2 plus deposits at institutions that are not banks (such as savings and loan associations)

133. THE CURRENT HARD-CURRENCY MONETARY SYSTEM OFFERS TO THE SOCIETY THE FOLLOWING ADVANTAGES: 6/24/2015134 Right of buying everything on sell: Money offers the possibility to acquire everything that people are ready to abandon there ownership right. This is the best quality of money and the counterpart is that there is no guarantee that everything on sell can be sold (unemployment !).

134. THE CURRENT HARD-CURRENCY MONETARY SYSTEM OFFERS TO THE SOCIETY THE FOLLOWING ADVANTAGES: 6/24/2015135 Right of saving: Selling with profit increases the personal freedom toward the society. This is the consequence of the interest rate system. Each profit can be put on saving with interest rate. From saving, the individual has the guarantee of a regular revenue and escapes from the constraint of work. Saving means buying "work equipment". So, the interest rate is in reality the revenue of the "work equipment". The current monetary system guarantees that the person which makes the investment and so is the cause the production of the "work equipment" receives the revenue of this work equipment.

135. WEAKNESS OF MONEY IN TERMS OF SOCIAL MEASUREMENT SYSTEM 6/24/2015136 To analyse the weakness in term of social measurement system should be made on the concept of lost of information (in the sense of the physician concept of entropy). Note: entropy: disorder or uncertain in the medical system. For eg : If the thermometer is disordered If the Stethoscope is disordered

136. WEAKNESS OF MONEY IN TERMS OF SOCIAL MEASUREMENT SYSTEM 6/24/2015137 So, money is a good system in the sense of keeping the debt between individuals. But, many information concerning the society are not kept and could be kept in the present capability of the computerized society. This lost of information could create the feeling of unfairness with individual who expect something they have never received.

137. LEARNING OUTCOMES At the end of the session, the student should be able to: 1. Understand the meaning of barter system 2. Understand the difficulties in barter system. 3. Understand the functions of money. 4. Explain meaning and definition of money. 5. Understand modern money and credit cards. 6. Explain why does money have value. 7. Understand the money creation process and how do banks create money. 8. Understand money multiplier with formula. 9. Explain the quantity theory of money with formula. 10.Understand the demand and determinants for money. 11. Understand the demand and supply function of money. 12. Understand the equilibrium and interest rate in the money market.

138. BARTER SYSTEM 139 In barter system, goods and services were exchanged for some other goods and services. Barter system is known as direct exchange system. In barter system, there was no money. What are the difficulties in barter system? 1) Lack of common measure of value There is no common measure of value in barter system. This is a big problem in exchange of one good for another. 2) Lack of double coincidence of wants Aziz has cloth. Aziz wants food. Amer has food. But Amer does not want cloth. In this example there is no double coincidence of wants. So Aziz and Amer cannot exchange their goods. This is the difficulty in barter system.

139. BARTER SYSTEM 140 3) Problem of Division Ahmed has a cow. He wants a pen. Now he faces a problem of dividing the animal. There was a problem of division of animals and large goods in barter system. 4) Lack of Store of Value In a barter system people can store wealth for future only in the form of goods. For example, some goods like flowers and fish may perish quickly. People cannot store the value for a long time. The values of the stores goods fall very much.

140. FUNCTIONS OF MONEY: 6/24/2015141 The invention of money solves all the problems of the barter system. There are many functions of money. The most important functions of money are: 1) Medium of Exchange: The most important function of money is that it serves as medium of exchange. Money is used for buying and selling goods and services. Example: Amer has a house. He wants to buy a car. Amer will first sell his house for money. He will buy a car from this money. This is very easy for Amer. With the help of money people can buy and sell goods and services easily and quickly.

141. FUNCTIONS OF MONEY: 6/24/2015142 2) Measures of Value: Money is the common measure of value of all goods and services. The value of all goods and services are measured by money. For example, the value of a car is RO 3000. The value of this car is measured in money. 3) Standard of Deferred Payments: Money serves as a standard of future payments. Like businessmen borrow money from banks and pay back the money after sometime. The loan amount is measured in money. For example: Aziz is a businessman. He borrows RO 50,000 from a bank. Aziz can repay RO 50,000 after one year with bank interest. When compared to value of goods, the value of money, Money is easy to store, and Money is convenient to store wealth. For example: Salem has 100 cows. Can he store the value of these 100 cows from 20 years? With the help of money, he can store the value of cows for 20 years or more.He can sell these cows for money and deposit the money in the bank.

142. WHAT IS MONEY? Money is a word derived from the Italian word moneta which today means coin. Money can be anything that is used for making payments and for accounting purposes. Generally, in order to be accepted as money, it must exhibit (show) certain characteristics , which, in effect, define the functions of money. The functions of money are medium of exchange, unit of account(unit of measurement), store of value, common measure of value, means of payment, and standard of deferred payment. The first three are the most commonly used functions . None of the functions occurs in a society based on barter. 6/24/2015143

143. DEFINITION OF MONEY There are other types of money apart from notes and coins, which can be accepted as a form of payment. Money can be any commodity that has a purchasing power. Money supply has different definitions, the first of which, M1, can be narrowly defined as including: Currency (notes and coins) in the hands of the public in circulation; and Checkable deposits that are usable as a medium of exchange. 6/24/2015144

144. MODERN MONEY According to Adam Smith, it is the acceptance of paper money in payment of taxes and the restriction of the issue that gives value to paper money. It was recognized that paper money need not be government fiat currency. Credit Cards are simple means of deferring payment for a short period. 6/24/2015145

145. WHY DOES MONEY HAVE VALUE? 6/24/2015146 1) Acceptability 2) Legal tender 3) Scarcity

146. THE MONEY CREATION PROCESS: HOW DO BANKS CREATE MONEY? The actual process of money creation takes place in the banks. A bank keeps primary and secondary reserves. Primary reserves are cash deposits and the reserves required by the central banking system. Secondary reserves are securities that the bank buys in the open market, which may be sold for short-term cash needs, and they are government bonds. Banks loan out depositors money. Then create what they loan out based on the fractional reserve banking method. Under this system a fraction of the money supply is backed by currency, for example gold held by gold- smiths in the vaults. 6/24/2015147

147. AN EXERCISE ON CREATION OF MONEY BY BANKS BALANCE SHEET OF BANK MUSCAT A) SHOW THE BALANCE SHEET OF EACH BANK AFTER EACH TRANSACTION. Assets Liabilities Cash 10000 Deposits(of Govt) 10000 6/24/2015 148

148. AN EXERCISE ON CREATION OF MONEY BY BANKS B) TOTAL AMOUNT OF MONEY IN THE ECONOMY AFTER THE LAST TRANSACTION; Name of the Bank Deposit Amount in OMR Bank Muscat 10,000 Bank Sohar 8,000 National Bank of Oman 6,400 Bank Dhofar 5,120 Total Deposits in the Banks 29,520 6/24/2015149

149. AN EXERCISE ON CREATION OF MONEY BY BANKS C) THEORETICALLY WHAT CAN BE THE MAXIMUM AMOUNT OF MONEY SUPPLY IN THE ABOVE TRANSACTION Money Multiplier = 1/r = 1/0.20=5 As the initial money deposited in the Bank Muscat is 10,000, theoretically . Total money supply in the economy = 10000 X 5 = 50,000 or 10000/0.20 = 50,000 6/24/2015150

150. AN EXERCISE ON CREATION OF MONEY BY BANKS D) IF CBO INCREASES THE REQUIRED RESERVE RATIO TO 25% WHAT WILL BE THE TOTAL SUPPLY OF MONEY? Money Multiplier = 1/r = 1/0.25=4 As the initial money deposited in the Bank Muscat is 10,000, theoretically . Total money supply in the economy = 10000 X 4 = 40,000 or 10000/0.25 = 40,000 6/24/2015151

151. AN EXERCISE ON CREATION OF MONEY BY BANKS E) IF CBO DECREASES THE REQUIRED RESERVE RATIO TO 10% WHAT WILL BE THE TOTAL SUPPLY OF MONEY? Money Multiplier = 1/r = 1/0.10=10 As the initial money deposited in the Bank Muscat is 10,000, theoretically . Total money supply in the economy = 10000 X 10 = 100,000 or 10000/0.10 = 100,000 6/24/2015152

152. AN EXERCISE ON CREATION OF MONEY BY BANKS F) STATE THE RELATIONSHIP BETWEEN THE REQUIRED RESERVE RATIO AND THE SUPPLY OF MONEY Required reserve ratio and the supply of money are inversely related. If required reserve ratio is increased, the supply of money in the economy decreases. If required reserve ratio is decreased, the supply of money in the economy increases. 6/24/2015153

153. MONEY MULTIPLIER 6/24/2015154 Money multiplier is the relationship between the monetary aggregate and the money supply. It exists because the reserves and deposits lost by Bank 1 are gained by Bank 2. It is also the multiple whereby the banking system expands its supply of money for each rand of excess reserves. It is used to indicate the increase in money supply to a given change in deposit

154. MONEY MULTIPLIER 6/24/2015155 The general rule for calculating the money multiplier is m = 1 / RR. Multiplier = M = 1 / r, Where R = required reserve ratio.

155. THE QUANTITY THEORY OF MONEY 6/24/2015156 At this point, it is worthwhile to examine a theorem that has dominated the understanding of money, and its relationship with macroeconomic variables such as inflation and unemployment. It is known as the quantity theory of money. It is also known as the equation of exchange and it attempts to explain the linkages between money, prices and economic activity.

156. THE QUANTITY THEORY OF MONEY 6/24/2015157 The Theory's Calculations In its simplest form, the theory is expressed as: MV = PT (the Fisher Equation) Each variable denotes the following: M = Amount of money in circulation (supply) V = Velocity of Circulation (the number of times money changes hands) P = Average Price Level T = Volume of Transactions of Goods and Services V and T are fixed with respect to the money supply. A constant V means that the demand for money is proportional to the nominal income. It is built on the principle of "equation of exchange": Amount of Money x Velocity of Circulation = Total Spending Thus if an economy has OMR 3, and those OMR 3 were spent five times in a month, total spending for the month would be OMR 15.

157. THE QUANTITY THEORY OF MONEY 6/24/2015158 QTM Assumptions An increase in the money supply would lead to an increase in the price level. Increases in the money supply would lead to inflation, which is caused by the money supply (M) growing faster than the economys capability to produce, reflected here by the level of transactions (T). Thus, the quantity theory of money rests, ultimately upon the fundamental peculiarity that money alone of all human goods has no power to satisfy human wants except for the power to purchase things that do have such power.

158. THE DEMAND FOR MONEY 6/24/2015159 Demand for Money The demand for money is the amount of wealth in the form of money or assets that the society wants to hold in the economy. The money demand relies on the risk of holding money and other assets, and on nominal expenditures.

159. DETERMINANTS OF THE DEMAND FOR MONEY 1. Transaction Demand: This is the demand to buy goods and services. It depends only on nominal GDP. The higher the money value of all goods the higher transaction demand for money. 2. Asset Demand: This acts as a store of value. In other words, people can hold money as an asset which reflects its store of value. Other financial assets that individuals are willing to hold include stocks and bonds. All of these. Including money are financial assets. 3. Total Demand: This is the total amount of money that the public wants to hold at each possible interest rate. It effectively refers to the sum total of the transaction demands and the asset demands for money. LO1

160. THE DEMAND FUNCTION OF MONEY Price Level: Here the money demand is proportional to the price level. The higher the price level, the higher the quantity of money demanded to buy goods and services. Interest rates: The interest rate is a key variable and determinant of the demand of money. When interest rates are higher the opportunity cost of holding cash is high and

161. THE SUPPLY FUNCTION OF MONEY Definition of money M1, M2, and M3. Assumptions: Banks create money by issuing loans out of their demand deposits. Money supply is determined by the rules and regulations that govern the financial system. The monetary base is the form of currency and bank reserves that are directly controlled by the reserve bank. Banks can loan out more money than is held as reserves. The amount of reserves held for every riyal is stipulated by the reserve bank(CBO). If the demand is stable, the quantity theory of money applies, which means an increase in the money supply leads to an increase in the price level, in other words, inflation. 13-20

162. DETERMINING EQUILIBRIUM IN THE MONEY MARKET Understanding of the Relationship between bond prices and the interest rate is important. Because, People can choose between the two assets in the money market. Either they will hold money or buy bonds. Therefore, the more bonds people purchase the less money they are holding. 13-21

163. By combining money supply and money demand to arrive at the equilibrium interest rate as shown below: The Outcome of an increase in the money supply is lower interest rates and of a decrease in the money supply is higher interest rates. 13-22 Determining Equilibrium interest rate

164. Outcome No: 8

165. LEARNING OUTCOMES At the end of the session, the student should be able to: 1. Understand the Definition of Exchange Rate 2. Understand the Types of Exchange Rates. 3. Understand the Determinants of the real exchange rate. 4. Explain the factors determining the exchange rate of a currency. 5. Understand what causes appreciation and change in the exchange rate 6. Deal with practical questions in exchange rate.

166. EXCHANGE RATE - DEFINITION: The price of one currency in terms of another is called Exchange rate. It is the amount of one currency that has to be given up to purchase another currency. Exchange rate between two countries is the price at which residents of those countries trade with each other. 6/24/2015167

167. TYPES OF EXCHANGE RATES Nominal exchange rate is the rate at which monies of different countries can be exchanged for one another Real exchange rate is the rate at which the goods and services produced in different countries can be exchanged for one another. 6/24/2015168

168. TYPES OF EXCHANGE RATES Another classification of exchange rates is based on the number of currencies taken into account. Bilateral exchange rates clearly relate to two countries' currencies Multilateral exchange rates are computed in order to judge the general dynamics of a country's currency toward the rest of the world. 6/24/2015169

169. TYPES OF EXCHANGE RATES When the exchange rate can freely move, assuming any value that private demand and supply jointly establish, "freely floating exchange rate" will be the name of currency institutional system. Equivalently, it is called "flexible" exchange rate. 6/24/2015170

170. TYPES OF EXCHANGE RATES If the central bank timely and significantly intervenes on the currency market, a "managed floating exchange rate system" takes place. But central banks can also declare a fixed exchange rate, offering to supply or buy any quantity of domestic or foreign currencies at a particular rate. This is called as fixed exchange rate". 6/24/2015171

171. DETERMINANTS OF THE REAL EXCHANGE RATE The real exchange rate is related to net exports. When the real exchange rate is lower. Domestic goods are less expensive to relative foreign goods and net exports are greater. The trade balance must equal the net capital outflow which in turn equals saving minus investment. 6/24/2015172

172. FACTORS DETERMINING THE EXCHANGE RATE OF A CURRENCY 1) Trade (exports/imports) 2) Inflation - relative inflation rates affects the economy's international competitiveness, so if the economy is experiencing higher inflation rate than its trading partners to such a situation that it is less competitive than they are, than there shall be less demand for the domestic currency as foreign markets will demand less goods and services from you, hence the demand for the domestic currency shall drop. 6/24/2015173

173. FACTORS DETERMINING THE EXCHANGE RATE OF A CURRENCY 3) Interest Rates - increasing the interest rate causes 'hot' money to flow into the economy, therefore the demand the domestic currency increases, therefore the currency appreciates. 6/24/2015174

174. FACTORS DETERMINING THE EXCHANGE RATE OF A CURRENCY 4) Speculation - simply a believe in the path the currency, shall cause speculators to adjust their trades in light of this believe. e.g. if currency speculators believe that an economy is overheating and soon there shall be a devaluation, then they will get out of the currency causing there to be more supply than demand for that currency, hence it depreciates. 6/24/2015175

175. WHAT CAUSES APPRECIATION/ CHANGE IN THE EXCHANGE RATE? Higher interest rates. If interest rates rise then it makes it more attractive to save money in banks and financial securities like bonds. Therefore this causes increased demand for money to deposit money in bank. This is called hot money flows The higher demand for money causes an appreciation of the exchange rate. 6/24/2015176

176. WHAT CAUSES APPRECIATION/ CHANGE IN THE EXCHANGE RATE? Inflation Rates. If inflation in the Oman is lower than elsewhere then it makes Oman goods relatively more attractive. Therefore there is an increase in demand for Oman exports and therefore higher demand for rials this will cause an appreciation. This is a significant factor in the long term. 6/24/2015177

177. WHAT CAUSES APPRECIATION/ CHANGE IN THE EXCHANGE RATE? Increase in competitiveness. This is related to lower inflation. If a country becomes more competitive because of increased labour productivity then there will be more demand for goods and the exchange rate. 6/24/2015178

178. WHAT CAUSES APPRECIATION/ CHANGE IN THE EXCHANGE RATE? Current Account Surplus. This means the value of imports (of goods and services) is less than the value of exports. Therefore more foreign currency is coming into the country than going out. 6/24/2015179

179. PRACTICAL QUESTION FOR MACRO ECONOMICS EXCHANGE RATE (OUTCOME 8) 1) If given exchange rate is, OMR 1 = 161 INR Find out how many OMR you will get if you have 2840 INR and you want to exchange your INR to OMR. Ans- 1 OMR = 161 INR (Current value from the internet) ? Omr = 2840 INR (1/161 ) X 2840 = OMR 17.640 180

180. PRACTICAL QUESTION FOR MACRO ECONOMICS EXCHANGE RATE (OUTCOME 8) 2) If given exchange rate is, 0.00704225 OMR = 1 INR Find out how many OMR you will get if you have 5680 INR and you want to exchange your INR to OMR. Ans - 0.00704225 OMR = 1 INR 0.00704225 OMR X 5680 INR = OMR 40 181

181. PRACTICAL QUESTION FOR MACRO ECONOMICS EXCHANGE RATE (OUTCOME 8) 3) If given exchange rate is, 1 OMR = 142 INR and 1 USD = 56 INR Find out how many USD you will get if you have 20 OMR and you want to exchange your OMR to USD. Ans - 1 OMR = 142 INR 20 OMR = 142 INR X 20= 2840 INR 1 USD = 56 INR 1 USD/56 = 1 INR (1 USD/ 56) X 2840= 50.71 USD 50.71 USD =2840 INR = OMR 20 182

182. PRACTICAL QUESTION FOR MACRO ECONOMICS EXCHANGE RATE (OUTCOME 8) 4) If given exchange rate is, 0.00704225 OMR = 1 INR and 1 USD = 56 INR Find out how many USD you will get if you have 20 OMR & you want to exchange your OMR to USD. ANs- 0.00704225 OMR = 1 INR 20 /0.00704225 OMR = 2840 inr 1 USD = 56 INR 1 USD/56 = 1 INR (1 USD/ 56) X 2840= 2840 INR 50.71 usd 20 omr=2840 inr=50.71 usd 183

183. Outcome No:9

184. LEARNING OUTCOMES At the end of the session, the student should be able to: 1. Understand the conceptual definition of Inflation 2. Understand the main causes of inflation. 3. Understand the Inflationary Gaps. 4. Explain the types of Inflation. 5. Understand the effects of Inflation. 6. Explain the measures to control Inflation. 7. Solve practical questions on Inflation.

185. DEFINITION: INFLATION Inflation means a sustained increase in the aggregate or general price level in an economy. Inflation means there is an increase in the cost of living. inflation means that your money wont buy as much today as you could yesterday. Inflation measures the annual rate of change of the general price level in the economy. Inflation is a sustained increase in the average price level. 6/24/2015186

186. COMPARING INFLATION WITH OTHER COUNTRIES 6/24/2015187

187. THE MAIN CAUSES OF INFLATION 1. Demand-pull inflation arises when aggregate demand in an economy outpaces (faster ) aggregate supply. It involves inflation rising as real gross domestic product rises and unemployment falls. This is commonly described as "too much money chasing too few goods". More accurately, it should be described as involving "too much money spent chasing too few goods", since only money that is spent on goods and services can cause inflation. 6/24/2015188

188. THE MAIN CAUSES OF INFLATION This would not be expected to persist over time due to increases in supply, unless the economy is already at a full employment level. The term demand-pull inflation is mostly associated with Keynesian economics. Main causes of demand pull inflation : Rapid growth of household consumption Increases in government spending Injections of demand from higher exports 6/24/2015189

189. THE MAIN CAUSES OF INFLATION Cost-push inflation is a type of inflation caused by substantial increases in the cost of important goods or services where no suitable alternative is available. A situation that has been often cited of this was the oil crisis of the 1990s, which some economists see as a major cause of the inflation. This occurs when firms increase prices to maintain or protect profit margins after experiencing a rise in their costs of production. 6/24/2015190

190. THE MAIN CAUSES OF INFLATION The main causes of cost push inflation are: Growth in Unit Labor Costs Rising input costs Increases in indirect taxes Higher import prices (Imported inflation) 6/24/2015191

191. INFLATIONARY GAPS When aggregate demand exceeds an economy's productive potential there is an inflationary gap. Controlling an inflationary gap The government may use monetary and or fiscal policy to help reduce the size of the inflationary gap. An improvement in the supply-side performance of the economy would also achieve this. 6/24/2015192

192. INFLATIONARY GAPS Monetary Policy: Higher interest rates to curb consumer demand Fiscal Policy: A rise in the burden of taxation to reduce real disposable incomes Supply-side Policy: Measures to increase productivity and efficiency. 6/24/2015193

193. INFLATIONARY GAPS This leads to a rise in aggregate supply and reduces the amount of excess demand in the long run. Inflationary gaps can arise when the economy has grown for a long time on the back of a high level of aggregate demand. Total spending may rise faster than the economy's ability to supply goods and services. As a result, actual GDP may exceed potential GDP leading to a positive output gap in the economy. 6/24/2015194

194. INFLATION: Inflation and unemployment are the important economic problems in many countries. During and after the 1st and 2nd world wars, many countries faced the problem of inflation. Prices in Germany increased by 300 times during the end of I world war and in 1922. What is inflation? Inflation is a situation in which general price level rises and value of money falls. Price and value of money have opposite relationship, If price rises, value of money falls. 6/24/2015195

195. TYPES OF INFLATION: 1) Demand Pull Inflation: When aggregate demand increases, without increasing output, general price level rises. This type of inflation is called demand pull inflation. 2) CostPush Inflation: When cost of production rises, supply falls and price rises. This type of inflation is called cost-push inflation. 3) Open Inflation: When prices continue to rise without any control it is called open inflation. This would affect the economy very badly. 6/24/2015196

196. TYPES OF INFLATION: 4) Suppressed Inflation: If the Government controls the price rise, then this inflation will be called suppressed inflation, because government tries to stop rising of the price level. 5) Creeping Inflation: If the general price level is rising by 3%, this type of inflation is called creeping inflation. Some economists think that creeping that creeping inflation is good for the growth of the economy. 6) Galloping Inflation: The general price level is rising between 8 % to 10%. This type of inflation affects middle class and poor people. 6/24/2015197

197. CAUSES OF DEMAND-PULL INFLATION 1. Increase in money supply 2. Increase in disposable income 3. Deficit financing 4. Increase in business investment 5. Increased foreign demand 6. Increase in population 6/24/2015198

198. CAUSES OF COST-PUSH INFLATION 1. Higher Profit (Producers) 2. Higher taxes 3. Fall in the supply of basic inputs 4. Higher prices for the basic inputs 5. Natural factors 6. Government policies (imposed minimum wages increase in labor cost) 7. Low industrial production 6/24/2015199

199. EFFECTS OF INFLATION: 1) Inflation impacts on income distribution: Those receiving fixed money income are usually disadvantaged because often their incomes are not adjusted with rising prices. Individuals whose income rises more rapidly than the inflation rate, usually gain from inflation. 2) Impact on Debtors and lenders: inflation tends to encourage borrowing and discourage lending, so debtors gain and creditors lose. 6/24/2015200

200. Inflation can be controlled in following ways: 1) Monetary Policy 2) Fiscal Policy 3) Other measures: Increased output, more imports, wage policy, price control Monetary Policy : Monetary policy refers to the policies relating to the changes in interest rate and controlling of money supply Fiscal policy : Fiscal policy is formulated by the government; Fiscal policy refers to the policies relating to various financial activities of the government such as taxing, spending, borrowing and debt management. 6/24/2015201

201. PRACTICAL QUESTION FOR MACRO ECONOMICS INFLATION (OUTCOME 9) 1) If price level in the end of year 2000 is 100 RO. Inflation rate in the year 2001 is 5% & in the 2002 is 5%. Find out the price level in the end of year 2002. Ans- price level in the end of year 2001 = 100 + 5 % of 100 =105 price level in the end of year 2002 = 105 + 5 % of 105 =110.25 2) If price level in the end of year 2000 is 100 RO. Inflation rate in the year 2001 is 10% & deflation in the 2002 is 10%. Find out the price level in the end of year 2002. Ans- price level in the end of year 2001 = 100 + 10 % of 100 =110 price level in the end of year 2002 = 110 - 10 % of 110 =99 6/24/2015202

202. (OUTCOME 9) 3) Find out the inflation rate during the year 2001 & during the 2002 from the following data- Price level in the end of year 2000 is 500 RO Price level in the end of year 2001 is 600 RO Price level in the end of year 2002 is 700 RO Ans- Inflation rate = (current price previous price) x100/previous price inflation rate during the year 2001= (600 500) x 100/500 inflation rate during the year 2001= (100) x 100/500 = 20% inflation rate during the year 2002= (700 600) x 100/600 inflation rate during the year 2002= (100) x 100/600 = 16.6666% 6/24/2015203

203. 6/24/2015 204 OUTCOME NO. 10:

204. LEARNING OUTCOMES At the end of the session, the student should be able to: 1. Understand the conceptual definition of employment and labour force 2. Understand what is not included in labour force. 3. Understand the definition of Unemployment. 4. Explain the types of Unemployment. 5. Explain the meaning of full employment. 6. Understand the methods of measuring unemployment. 7. Explain the different types of unemployment. 8. Understand the cost of unemployment. 9.Understand the measures to reduce unemployment.

205. DEFINITION : EMPLOYMENT & LABOR FORCE EMPLOYMENT refers to the use of factor of production (resources) in the production of goods and services. In practice, employment usually used in reference to Labor force. LABOUR FORCE refers to all people, over the age of 16, who either have a job or are actively looking for job. LABOUR FORCE = Number of Employed + Number of Unemployed who attained the age to work

206. NOT INCLUDED IN THE LABOUR FORCE Under the age of 16 Persons not seeking employment Military Personnel Full Employment: If unemployment rate is 5% or lower, the economy is considered to have attained the goal of full employment.

207. DEFINITION OF UNEMPLOYMENT 6/24/2015208 An economic condition marked by the fact that individuals actively seeking jobs remain unhired. Unemployment is expressed as a percentage of the total available work force. The level of unemployment varies with economic conditions and other circumstances. Unemployment can be measured as a number or percentage from total of labour force. Children, pensioners and parents choosing to stay at home to look after their children to stay at home to look after their children are to be excluded from the unemployed.

208. LABOUR FORCE, UNEMPLOYMENT, UNEMPLOYMENT RATE 6/24/2015209 Labor Force: Labour force is defined as those in employment plus those who are unemployed. Unemployment: Who are reached working age and willing to work for the current market wage but cannot find jobs Unemployment Rate: The number of unemployed expressed as a percentage of the labour force, unemployment rate is the number of unemployed workers divided by the total of labour force. Unemployment Rate = Unemployment x 100 Labour force

209. PRACTICAL QUESTION FOR MACRO ECONOMICS UNEMPLOYMENT (OUTCOME 10) 6/24/2015210 Find out the value of labour force & unemployment rate from the following data- 20000 persons are having the age of 10 years. 42000 persons are having job 18000 persons are not having job but seeking job actively 140000 persons are not having job & not seeking job actively 14000 persons are military personnel

210. MEANING OF FULL EMPLOYMENT: 6/24/2015211 Full employment does not mean zero unemployment. Always there will be some people remain unemployed because of frictional, structural, seasonal and residual unemployment. Some economists define full employment. Some economists define full employment as less than 3 % unemployed.

211. METHODS OF MEASURING UNEMPLOYMENT: 6/24/2015212 Unemployment can be measured in a number of ways. The two important methods of measuring unemployment are: Claimant Method: This method includes as unemployed anyone between the ages of 18 and 60 receiving an unemployment benefit. The labor Force Survey: This is also known as the ILO measure. It uses the International Labor Organizations definition of unemployment. This counts as unemployed all those who are actively seeking an available to start work, whether or not they are claiming benefit.

212. TYPES OF UNEMPLOYMENT 6/24/2015213 1. Residual Unemployment: In all societies there is an element of residual unemployment because there will always be some people who are virtually unemployable on a permanent basis. These are the people, for whatever reasons find it difficult or impossible to cope with the demands of modern production methods and the disciplines of organized work.

213. TYPES OF UNEMPLOYMENT 6/24/2015214 2) Frictional Unemployment (Search Unemployment) : People leave jobs for two reasons. a) Voluntarily leaves job and b) Sacked by the employer or made redundant and so they are unemployed. These people will be looking for a new job. The unemployed will not take the first job offered. He or she may wait for the best job. The workers are not informed about what jobs are available. Employers are not fully informed about what labour is available.

214. TYPES OF UNEMPLOYMENT 6/24/2015215 3) Structural Unemployment: Structural unemployment is where the structure of the economy changes. For example, employment in some industries may expand while in some other industries may contact. There are two main reasons for this: i) Unemployment because of Change in demand: In some industries there may be decrease in demand. This is because of change in the tastes of the consumers or because of competition from another company. ii) Change in Technology: New techniques of production allow the same level of output to be produced with fewer workers. This is another reason for structural unemployment. For example use of ATMS. Reduced bank clerks.

215. TYPES OF UNEMPLOYMENT 6/24/2015216 4) Cyclical Unemployment: Cyclical unemployment is referred to as demand deficiency unemployment. This type of unemployment is because of insufficient demand. 5) Seasonal Unemployment: Seasonal unemployment occurs when the demand for labour changes with the seasons of the year. For example during Kharif season, the demand for workers is more. But after kharif season, the demand for workers will be less and some workers will be unemployed.

216. TYPES OF UNEMPLOYMENT 6/24/2015217 6)Regional Unemployment: This is related to structural unemployment. It arises when the declining industry is concentrated in one area. 7)International Unemployment: This is also related to structural unemployment. It arises when workers lose their jobs to a fall in demand for domestically produced goods and services.

217. COST OF UNEMPLOYMENT 6/24/2015218 Cost of Unemployment to the unemployed people; 1. Lack of Income 2. Loss of Status 3. Health problems, mental stresses and family problems 4. Loss of the value of human capital (skills can be rusty) Cost of Unemployment to the society: 1. Loss of Output 2. Loss of taxes to the government.

218. MEASURES TO REDUCE UNEMPLOYMENT 6/24/2015219 1. The Keynesian Approach: (Demand Side) Keynes believes unemployment is mainly due to lack of aggregate demand. According to him, Total Planned Expenditure is less than total Output. That is Total Planned Expenditure is less than Total planned Leakages. Aggregate Demand Management: Keynes suggested the government should pay an important role in increasing the aggregate demand. Government must increase its spending and reduce taxation. 2. Monetary Policy: Monetary policy should encourage private investment and consumption spending. For this the banks should reduce interest rates.

219. MEASURES TO REDUCE UNEMPLOYMENT 6/24/2015220 3. Exchange Rate Policy: The government should reduce exchange rate. This will help exports. This will increase domestic demand and domestic employment. 4. The Supply Side Approach: Neo Classical economists believed that increasing aggregate demand in the long run will not reduce unemployment is to increase to total supply. How to increase supply? Less tax Education and Training of labor and improving their skills and thereby improving their productivity.

220. 6/24/2015 221 OUTCOME NO. 11:

221. LEARNING OUTCOMES At the end of the session, the student should be able to: 1. Understand the conceptual definition of economic growth and development. 2. Understand the benefits of economic growth. 3. Understand the disadvantages of economic growth.

222. DEFINITION: ECONOMIC GROWTH 6/24/2015223 It is a term used to indicate the increase of total GDP. It is often measured as the rate of change of gross domestic product (GDP). It refers only to the quantity of goods and services produced; it says nothing about the way in which they are produced.

223. DEFINITION: ECONOMIC DEVELOPMENT 6/24/2015224 Economic Development- It refers to change in the way goods and services are produced; positive economic development involves the introduction of more efficient or "productive" technologies or forms of social organization. What is Sustainable Development? Sustainable economic development refers to increasing the output in a way which does not damage the environment and which enables increases in output to continue.

224. ECONOMIC GROWTH 6/24/2015225 Economic growth is that branch of one, which deals with the study of rate of change of gross domestic product, referring to the quantity of goods and services produced. Economic growth can either be positive or negative. Negative growth can also be referred to by saying that the economy is shrinking. Negative growth is associated with economic

225. BENEFITS OF ECONOMIC GROWTH 6/24/2015226 Improvements in living standards Rising Employment The accelerator effect of growth on capital investment

226. BENEFITS OF ECONOMIC GROWTH 6/24/2015227 Greater business confidence The fiscal dividend to the government: sustained GDP growth boosts tax revenues and provides the government with EXTRA MONEY to improve public services such as education and healthcare. It makes it easier for a government to reduce the size of a budget deficit. Potential environmental benefits

227. BENEFITS OF ECONOMIC GROWTH 6/24/2015228 Improvements in living standards: Growth is an important avenue through which better living standards and lower rates of poverty can be achieved. This is particularly true for countries who regard growth as a key route for poverty reduction among their population. Rising Employment: Growth stimulates higher employment.

228. BENEFITS OF ECONOMIC GROWTH 6/24/2015229 The accelerator effect of growth on capital investment: Rising AD and output encourages investment in capital machinery this helps to sustain growth by increasing LRAS. Greater business confidence: Growth has a positive impact on company profits & business confidence good news for the stock market and for the growth of small and large businesses. The fiscal dividend to the government: Government finances are cyclical in nature because a growing economy boosts the tax revenues flowing into the Treasury and it also provides the government with more money to finance spending projects.

229. BENEFITS OF ECONOMIC GROWTH 6/24/2015230 Potential environmental benefits richer countries have more resources available to invest in cleaner technologies. And, as nations move to later stages of development, energy intensity levels start to fall. Much depends on how many resources an economy is willing to devote to environmental improvement and protection. Over the last thirty years, the ratio of energy consumption per unit of GDP has fallen quite significantly. The reduction in energy intensity is a reflection of improvements in production technologies and also a gradual switch towards a low carbon economy.

230. DISADVANTAGES OF ECONOMIC GROWTH 6/24/2015231 Inflation risks: There is the danger of demand-pull and cost-push inflation if demand grows faster than long run productive potential High and rising inflation can be destabilizing for an economy because it puts pressure on interest rates to rise and can cause a loss of competitiveness for domestic businesses in international markets.

231. DISADVANTAGES OF ECONOMIC GROWTH 6/24/2015232 The environment: Economic growth cannot be separated from its environmental impact. Fast growth of production and consumption can create negative externalities such as increased noise and air pollution and road congestion. Environmental damage can have a negative effect on our quality of life and limits our sustainable rate of growth.

232. DISADVANTAGES OF ECONOMIC GROWTH 6/24/2015233 Inequalities of income and wealth: Not all of the benefits of growth are evenly distributed. We can see a rise in real GDP but also growing income and wealth inequality in society which is reflected in an increase in relative poverty. Regional disparities: Although average living standards may be rising, the gap between rich and poor can widen leading to an increase in relative poverty and a widening of the gap between different regions.

233. Outcome No. 12 6/24/2015 234 PRINCIPLES OF MACROECONOMICS (BAEC 2204)

234. LEARNING OUTCOMES At the end of the session, the student should be able to: 1.Understand the three phases of Omani economic development. 2. Understand the economic growth of Oman. 3. Understand the Oman economy. 4. Understand the Omans economic indicators.

235. THREE PHASES OMANI ECONOMIC DEVELOPMENT 6/24/2015236 A period of rapid expansion between 1970 and 1986; Economic retrenchment and rationalization between 1986 and 1989 as a result of the 1985-86 oil price collapse; and A period of stabilized growth since 1990.

236. ECONOMIC GROWTH 6/24/2015237 Economic growth and structural change have proceeded rapidly in Oman during the rule of HM Sultan Qaboos Bin Said Al-Said. Oman, however, lagged behind such neighbouring gulf emirates as Kuwait and the UAE as a result of the late discovery of oil and financial constraints in the first half of the 1970s.

237. ECONOMIC GROWTH 6/24/2015238 Nonetheless, increased government expenditure as a result of the commercial production and export of oil transformed the standard of living in Oman. By the latter half of the 1980s, Oman emerged as a middle-income country after entering the development process as one of the poorest Arab states. Per capita income rose from US$360 in 1970 to US$3,140 in 1980 and to US$7,000 in 1991.

238. ECONOMIC GROWTH 6/24/2015239 When HM Sultan Qaboos Bin Said Al-Said assumed power in 1970, he immediately implemented an economic development and modernization program. Priority was given to expanding the country's almost nonexistent infrastructure. In the early 1970s, substantial progress was made in developing physical and social infrastructure, mainly in the form of roads, a new deepwater port, an international airport, electricity-generating plants, desalination plants, and schools, hospitals, and low-cost housing.

239. ECONOMIC GROWTH 6/24/2015240 Government revenue derived almost exclusively from oil receipts made this possible. Economic growth was accompanied by uneven structural development, however. In 1960 agriculture accounted for 75 percent of the gross domestic product; by Oman's fiscal year 1991, its share had fallen to less than 3 percent.

240. ECONOMIC GROWTH 6/24/2015241 By contrast, industry (including petroleum), which accounted for only 8 percent of GDP in 1960, increased to 59 percent by 1985. Manufacturing increased only from 1 percent to 3 percent and services from 18 percent to 38 percent in the same period.

241. ECONOMIC GROWTH 6/24/2015242 As a result, in 1993 Oman's economy was dominated by the petroleum sector and the services sector. Aware of the vulnerability produced by dependency on a depletable natural resource, the government has increased funding for sectors based on renewable natural resources that can provide sustainable economic growth.

242. ECONOMIC GROWTH 6/24/2015243 The government is concentrating on the agriculture and fishing sectors, encouraging tourism, and constructing light industrial parks with the objective of exporting consumer goods to its Gulf Cooperation Council (GCC) partners. Oman is a middle-income economy that is heavily dependent on dwindling oil resources, but sustained high oil prices in recent years have helped build Oman's budget and trade surpluses and foreign reserves.

243. OMAN ECONOMY 6/24/2015244 Oman joined the World Trade Organization in November 2000 and continues to liberalize its markets. It ratified a free trade agreement with the US in September 2006, and, through the Gulf Cooperation Council, seeks similar agreements with the EU, China and Japan.

244. OMAN ECONOMY 6/24/2015245 As a result of its dwindling oil resources, Oman is actively pursuing a development plan that focuses on diversification, industrialization, and privatization, with the objective of reducing the oil sector's contribution to GDP to 9 percent by 2020.

245. OMAN ECONOMY 6/24/2015246 Muscat is attempting to "Omanize" the labour force by replacing foreign expatriate workers with local workers. Oman actively seeks private foreign investors, especially in the industrial, information technology, tourism, and higher education fields. Industrial development plans focus on gas resources, metal manufacturing, petrochemicals, and international transhipment ports.

246. OMANS ECONOMIC INDICATORS 6/24/2015247 GDP: $60.89 billion (2007 est.) GDP growth rate: 4.3% GDP per capita: $19,000 GDP composition by sector: agriculture: 2.7% industry: 39% services: 58.3% Inflation rate: 1.2% Labor force: 920,000 (2002 est.) Unemployment: 15% Electricity production by source: fossil fuel: 100% Industries: crude oil production and refining, natural gas production, construction, cement, copper Agriculture: dates, limes, bananas, alfalfa, vegetables; camels, cattle; fish Exports: petroleum, reexports, fish, metals, textiles Export partners: China 23.4%, South Korea 17.6%, Japan 15.4%, Thailand 13.7%, UAE 6.2% Imports: machinery and transport equipment, manufactured goods, food, livestock, lubricants Import partners: UAE 19.5%, Japan 16.9%, UK 8.4%, US 7.2%, Germany 6.1% Currency: Omani rial (OMR)

247. OMANS ECONOMIC INDICATORS 6/24/2015248 GDP: $95.0 billion (2015 Index of economic freedom) GDP growth rate: 4.7% GDP per capita: $29,813 GDP composition by sector: agriculture: 2.7% industry: 39% services: 58.3% Inflation rate: 1.3% Labor force: 920,000 (2002 est.) Unemployment: 8.0% Electricity production by source: fossil fuel: 100% Industries: crude oil production and refining, natural gas production, construction, cement, copper Agriculture: dates, limes, bananas, alfalfa, vegetables; camels, cattle; fish Exports: petroleum, reexports, fish, metals, textiles E