Coffee Planet Strategic Management

Introduction Coffee Planet is a United Arab Emirates (UAE) company that runs a roaster for coffee beans and sells coffee drinks and other beverage in its coffee shops located throughout the UAE. The business has all its operations in the UAE and operates from Dubai serving customers from different nationalities that are traveling to the country or living in it.Advertising We will write a custom report sample on Coffee Planet Strategic Management specifically for you for only $16.05 $11/page Learn More The company seeks to disrupt the status of the coffee shop business in the Middle East, starting with the UAE. Its mission is to make the coffee landscape exciting, beginning with the process of making coffee and then coming up with amazing blends that offer a new coffee enrichment value to customers (Coffee Planet para. 1-4). The objective of the Coffee Planet’s coffee roaster is to ensure that coffee experts are in charge of the making coffee sold to customers. The business has to deliver its unique flavor to every customer buying its roasted coffee. Therefore, its operational objectives are to sustain the quality of the flavor of the roasted coffee, according to the secret formula used to define the Coffee Planet brand. Another objective is to make sure that the coffee is delivered conveniently to customers in a simple to use and access way. Thus, the business has to manage a number of retail distribution networks to make sure that there is fresh, high-quality coffee on demand for customers at non-conventional coffee outlets, such as fuel stations and other places where people stop for refreshments. Currently, the business is relying on a fresh milk coffee machine that allows it to mix the perfect blend of coffee, according to its secret formula. It enables the business to provide excellent gourmet coffee at all fuel stations in the Middle East, which has been the business model responsible for the growth of the company from its roots in Dubai, the UAE. As for performance, there is a sales threshold that should be met daily and monthly by the individual fresh milk coffee machines. The advanced technology system used by the business must also support other operations, especially roasting to ensure that there is sufficient coffee inventory to meet fluctuations in demand in different regions. At the same time, the customer relations handling in the business has to work correctly at ensuring that the Coffee Planet brand continues to grow the reputation of being unique and exciting.  Coffee Planet supplies coffee to fuel stations located throughout the UAE using its special delivery machines. It also provides coffee to hotels, restaurants, and catering companies that are interested in delivering the exciting brand to their customers.Advertising Looking for report on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More The company seeks to dominate t he coffee business in Dubai and the rest of the UAE by having its coffee as the main input for many coffee drinks served at various locations. Other than the UAE, the company is also serving Oman, Malaysia, and Holland markets. Typically, the company concentrates on delivering coffee on the go and is not in direct competition with businesses that sell their coffee through dedicated coffee shops. Currently, the company has more than 10,000 repeat customers in the UAE. The biggest deliverable for its operations is the quality of the coffee it sells to consumers. 5P Model for Coffee Planet Product – the ground coffee delivered to various clients and outlets where the coffee is mixed with milk to provide coffee drinks to customers is the product sold by Coffee Planet. The convenience of getting gourmet coffee of the best quality is also a service that the company provides. Promotion – the company relies on its brand visibility in many of its outlets located in fuel station s as one way of promoting the brand. Price – the coffee is priced as premium coffee, which is competitive compared to the rival products of other businesses and in agreement with the prevailing costs of production. Place – the coffee by Coffee Planets sells at fuel stations across the UAE, and in various airlines, restaurants and hotels. It also sells to other countries in the Middle East and North Africa region under the same distribution framework. Process of conversion Business processes for Coffee Planet include the sourcing of Arabica coffee from markets around the world where the bean grows. Coffee Planet proceeds to roast the beans after the purchase of sorted beans, according to desired quality grades. The primary inputs of operation include the beans being roasted as raw materials and other beans, roasted or partially roasted for use as part of the blending process.Advertising We will write a custom report sample on Coffee Planet Strategic Management spec ifically for you for only $16.05 $11/page Learn More Blending helps in introducing new flavors into the coffee production chain. Production moves to the quality analysis stage after the process. A sample of every production batch is taken for testing to ensure that it has a consistent taste, texture and feel, as specified in its brand qualities. After meeting the minimum thresholds of quality, the coffee is certified for brewing and enjoying. Physical layout of the process flow The process of coffee production begins with loading of coffee beans from bags to roaster machines. The machines are then set according to temperature, oxygen levels, and duration of roasting to start the roasting process. The roasted beans are delivered for sorting and selection for brewing or packing. Brewing is done according to different flavor standards, which are then distributed to the dispensing machines located in fuel stations throughout the country and other markets. Beside s the coffee, the business also sources cups that are branded with its logo used to take coffee from the point of sale machines. With the roasting plant, there are separate rooms for storage and conveyance of the coffee to the loading area for roasting. The utility relies on tubular conveying systems from the loading point to the roast point. Beans are unloaded from sacks onto the roasting machine, where they are moved through centrifugal mixers to direct the flow of different beans at various roasting options. There are flavoring stages located separately from the roasters, which help to avoid contamination and ensure high quality of beans and coffee output prevails. Grinding happens separately for flavoring. After flavoring, the packing parts of the plant handle the different flavors. Workers then move the packaged products for storage, awaiting sale and delivery to coffee outlets. Business relies on dedicated packaging equipment to limit the time wasted when switching from one fl avor to another. The plant layout is created in a way that ensures there is no contamination of flavors as different semi-processed and fully processed coffee products do not mix and are stored separately to avoid aroma contamination. The warehousing section of packaged products is isolated and linked to transport outlets for movement through road transport. Overall, the physical parts of the roasting process layout are the green bean storage areas, roaster, cooling equipment area, blending area, packaging equipment area, and warehousing area.Advertising Looking for report on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Parameters followed in designing the layout include the need to keep beans in shape, need to prevent a mix of aromas and flavors, need to prevent pollution, and need to make sorting easy and production scheduling easy. Nature of capacity of the operation At the roasting stage, the volume of beans roasted and the time taken to roast beans to medium roast or other roast levels affect the overall duration of the process. Attention to detail is a requirement because any excessive roasting destroys a particular output. The output of roasting coffee beans is noted by the color of the roasted beans, and the roasting plant allows inspections to check the progress at every stage. Coffee Planet has the largest premium UTZ-certified roastery in the UAE region. The company has a coffee expert tasked with the identification of the best quality coffee from various source markets around the world. The expert inspects coffee plantations, washing stations, and coffee mills to identify the supply cha in processes that are responsible for delivering the best quality coffee beans to the Coffee Planet roastery in Dubai (Coffee Planet para. 1- 3). With a talented roastmaster, Coffee Planet can ensure that its production process follows all delicate procedures with consistent checks done, including the cupping stage and the brewing phase. Besides, the company has a coffee laboratory that allows it to seek the best parameters for roasting and blending of different types of coffee beans sourced from suppliers around the world. The laboratory ensures that all coffee types bought by the company eventually yield their preferred flavors and fragrances when roasted.  Coffee Planet has a USD 2 million roastery in the Gulfood expo in Dubai that is capable of producing more than 160 tons of premium Arabica coffee monthly. Initially, the business was able to serve about 4 million cups of coffee annually. The company is now able to serve 6 million cups annually, an indication that it meets a g oal of serving coffee every five seconds. The local roasting process has been in existence since 2008 (â€Å"Coffee Planet Unveils $2m Roastery† para. 3-5). Operation planning process As the company grows to serve additional markets beyond the UAE and increases the number of its gourmet coffee dispensing machines within the UAE, it has to increase its capacity to roast and serve coffee. Therefore, one of the numbers used for planning is the forecast for the demand in various market sectors. The company has been able to grow its capacity of roasting gradually from five tons per month in 2008 to more than 45 tons per month currently. Other than looking at the current demand for coffee, the company also considers the current global production capacity and the projected growth of coffee markets around the world. It uses the global figures to estimate the price of coffee and its impact on production efficiency. Currently, the company seeks to capitalize on the growth of coffee con sumption throughout the Arabic region. It uses the data to make decisions on boosting its capacity and surpassing quality coffee levels limits in various markets that it serves. The company is also actively looking for additional delivery channels that have significant traffic. For example, it now offers manned kiosks in events to supplement its automatic dispensing machines for gourmet coffee located at fuel stations around the country. Scheduling of work Roasting happens in batches, with employees overseeing each batch process. The loaders of coffee into coffee machines work in tandem with operators of coffee roasters to ensure a smooth production process. The machines are not left idle during the loading time as they are already roasting previously loaded beans. Meanwhile, the packaging processes or brewing processes continue concurrently with the roasting. Operations continue throughout a working day with scheduled stops. Meanwhile, order processes consider the demand for differ ent outlets belonging to Coffee Planet as well as orders from customers such as hotels and airlines. There are also single-serve capsules produced by the company, and their production and stocking is similar to that of other coffee. However, the production follows demand such that production temporarily stops when stock inventory is full. Inventory management After packaging and warehousing, the company has to consider its daily demand for 15,000 cups of coffee and the expected growth of the demand. Therefore, inventory in its warehouse is more than the daily demand for servings, but only slightly. Dispensing machines also have a stock option that allows them to be refilled periodically. The company runs regional stores for serving its outlets, and they have a capacity for holding stock enough for a full refill cycle of every store within the region. On the other hand, green beans are sourced and stored based on the monthly targets for roasting. It is informed by the time needed to procure and transport beans from their respective harvest and auction areas to Dubai at the roasting facility. The ability to store beans and keep them fresh before roasting also informs the company of its preferred green beans inventory levels. Procurement and delivery All inputs in the coffee business follow good sustainable practices. With an UTZ certification, the company ensures that its sourced coffee has beneficial elements along the supply chain all the way to the coffee farmer. The business also uses the certification obligations as part of its quest to trace all the beans to their origin. One of the minimum standards that suppliers must adhere to is the delivery of beans grown at altitudes of at least 1700 meters above sea level. The company relies on third-party transport solutions for delivery. Analysis of Performance The fundamental dimensions of manufacturing performance are available through a review of quality, delivery reliability, delivery speed, price or cost of p roduction, and flexibility. Flexibility can refer to the ability of a form varying its production volume or the ability to introduce new products rapidly. The following are the operations output parameters that Coffee Planet seeks to achieve. The output has to be of a higher quality than the non-ground coffee and must meet customer expectations of ground coffee. The products packaged or distributed in the wholesale, and retail markets must remain fresh for the entire time of distribution. The company requires the flexibility of increasing production to meet changes in demand in a short period and introduce new products. The current volume must be able to meet its share of the local and regional market and provide a 10 to 15 percent room for growth. The roasting facility and packaging facilities have to work as scheduled to meet demand and ensure consistency of high-quality coffee. Table 1: Table summarizing operations system performance of Coffee Planet Industry Coffee Planet Rem arks 150 concessions (in year 2011) Good 7,156 tons (current annual demand for ground coffee) 160-ton monthly roasting capacity Enough room for flexibility in production 10,000 cups (year 2013 daily retail servings) Good 25 % discount on internal brand prices for Coffee Planet wholesale market pricing Enough room for price flexibility Increased awareness and demand of high quality ground coffee Consistency in quality of coffee and use of fair trade practices The strategy will ensure Coffee Planet sustains its market share and growth 13% (projected annual increase in total demand for ground coffee in UAE) Distribution joint venture with Ahmed Hassan Bilal Trading (Year 2015) Sufficient capacity and flexibility in meeting customer demand Effectiveness of operations process According to Divecha (para. 1), Coffee Planet has sufficient space at its production center at Gulfood, Dubai to expand and meet the growing demand. It shows that the company can achieve the flexib ility required to introduce new products quickly or increase the volume of the production of the current product. The roaster and central packaging area are located in an economic zone in Dubai. It allows the company to tap into other distribution resources for getting raw inputs and sending output to various destinations in the region. The packaging options of the hotel enable it to serve single service machines that are usually in hotels, as well as the multiple serving machines used in hotels and its outlets. The flexibility produced by the different packaging options also improves the effectiveness of the company as it can use the same delivery and distribution channels to move various products to cater to single customers or groups of customers. The company is relying on a joint venture partnership with Ahmed Hassan Bilal Trading for distribution to ensure that it sufficiently increases its brand presence throughout the region. Collaborating with a shipping expert company will ensure that Coffee Planet can concentrate more on delivering high-quality coffee to its clients. It will also ensure that there are no quality compromises, and customer satisfaction mistakes encountered in the course of distribution (Divecha para. 3-5). The company has transitioned successfully from a local focus to a regional and international attention. The roasting capacity has increased due to investment in bigger and more efficient roasting equipment and accompanying packaging options. The company’s business model also allows it to embrace different distribution channels concurrently, which enables it to enjoy agility that makes its fast and responsive to market trend changes. With a big distribution partnership, it is also to maintain a low cost of distribution and sustain its profit margins, which are essential for its growth.  Coffee Planet can meet is production output goals because it has an elaborate network. It is also following market trends, where coffee consu mers are showing increased signs of preference for a brew made from fresh-roasted beans. Therefore, the ability of Coffee Planet to dominate the production chain, from roasting of green coffee beans to delivering brewed coffee in specialized serving machines to customers is a competitive advantage. The company succeeds because of its quality assurance program that ensures the consistency of coffee flavor is the same. Therefore, part of the success comes from the process management at the company while another part is due to the growing demand and the limited number of suppliers. Overall, Coffee Planet is succeeding because of a concentration of future demand and present efficiency improvements. Location targeting for its outlets and business partnerships with various big hotel and airline companies is also a strategy that helps ensure there is the consistent delivery of coffee to target clients and a sustainable growth of the enterprise.  Coffee Planet can meet the local demand fo r coffee easily amid its growth with its production capacity of 160 tons of Arabica coffee monthly. The demand was 7,156 tons in 2014, which was 11% higher than the demand for 2013. Sales of ground coffee in the market increased by 13% in the previous year, while the current distribution deal with Ahmed Hassan Bilal Trading and the roasting facility in Dubai will ensure Coffee Planet continues to exceed its demand without significantly investing in production and distribution capacity in the short-term (Jones para. 11-18). Pricing of coffee is also another factor that helps ensure the business remains sustainable and can meet its output consistently. The company can charge premium practices and justify its fair trade practices along its coffee supply chain, as the biggest coffee roaster in the UAE with a business model catering to retail and wholesale markets. The company can meet meticulous customer demands due to its attention to detail at every level of production and packaging. It has 150 concessions in petrol stations and can deliver more than 10,000 servings of coffee daily of the same quality by relying on its investment in technology. Consistency also ensures that customers continue trusting the brand and recommending it to other potential clients, which goes on to increase demand to match projections and production schedules by the company. Lastly, the business succeeds because it does not rely on cost-saving strategies, but it works for the best quality delivery options available and meeting increasing demand. This procedure ensures that there are choices made regarding the capacity and quality of service or product delivery for every incremental investment in the business. Eventually, large capacity in both production and distribution has allowed Coffee Planet to have an advantage in its pricing, where it offers a 25 percent discount on wholesale prices compared to international offerings. Overall, there are no areas where operations at Coffee Plane t fail in delivery. The discussion above has highlighted the main reasons for success and areas where operations are succeeding (â€Å"Coffee Planet: The Sell – Becoming a Coffee Planet Franchisee† 2-7). Recommendations With the partnership for distribution with Ahmed Hassan Bilal Trading, Coffee Planet should to be prepared to handle overhead costs that arise out of the need to have additional control of its distribution quality to ensure that coffee delivered to customers is fresh. Besides the concessions at fuel stations, the company should consider drive in outlets that allow customers to have alternative ways of serving its customers. The company should also continue with its training programs to ensure that workers can meet quality expectations and succeed in doing the business as a one-stop shop for coffee. The need for franchising will increase as the company grows, which will increase the complexities of operations. Retaining the roasting process under the mai n company and the raw material and packaging processes within the parent company will be a good way to sustain the agility of its operations amid fluctuations in demand. Works Cited â€Å"Coffee Planet Unveils $2m Roastery.† TradeArabia, 2011. Web. Coffee Planet 2015. Web. Coffee Planet: The Sell – Becoming a Coffee Planet Franchisee 2015. Web. Divecha, D. â€Å"Coffee Planet Celebrates 10 Years Amidst Expansion.† Hotelier Middle East,  2015. Web. Jones, R. â€Å"Coffee Rookies Hopes to Roast Rivals in the UAE.† The National Business,  2011. Web. This report on Coffee Planet Strategic Management was written and submitted by user Sp1der-Ham to help you with your own studies. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly. You can donate your paper here.

The Economic Performance of the UAE

The Economic Performance of the UAE The aim of this paper was to analyze the economic performance of the United Arab Emirates (UAE). In particular, the paper focused on the effect of the decline in economic growth rate in 2012 and the fiscal policy that can be implemented to boost economic growth. The IMF predicted a reduction in economic growth of the country from 4.9% in 2011 to 2.3% in 2012. The country’s limited capacity to increase oil production is one of the factors that were expected to cause the decline in economic growth.Advertising We will write a custom report sample on The Economic Performance of the United Arab Emirates specifically for you for only $16.05 $11/page Learn More The findings of this paper indicate that the reduction of economic growth rate would reduce the country’s real output and increase unemployment in the long-run. Consequently, the government should implement an expansionary fiscal policy in order to stimulate economic growth. Moreover, the gover nment should focus on controlling the inflation and the crowding-out effect associated with expansionary fiscal policy. Summary of the Article According to the International Monetary Fund (IMF), the expansion rate of the economy of the United Arab Emirates (UAE) was expected to reduce from 4.9% in 2011 to 2.3% in 2012. The reduction was attributed to the country’s inability to increase its oil production. Nonetheless, the economy was expected to maintain its recovery. The 2009-2010 Dubai debt crisis adversely affected the country’s property industry. Consequently, Dubai World, which is a state-owned corporation, had to restructure its debts that were worth twenty five billion dollars. Nonetheless, the country was able to survive the crisis due to favorable oil prices and improved trade with Asia. According to the IMF, the uncertainty of the performance of the world economy was a threat to UAE’s forecasted growth. Concisely, continued decline in the performance o f the world economy would limit the ability of UAE’s state-owned corporations to replace their maturing debts with new ones. Despite the efforts made to restructure the debts, most state-owned corporations still required high refinancing. The IMF also believed that the government’s decision to consolidate fiscal policy was right. Explanation of the Article based on AD-AS Model The economy of the UAE as described in the article can be explained in the framework of the aggregate demand (AD) and aggregate supply (AS) model. The model is made of up of three curves namely, the â€Å"aggregate demand curve (AD), the short run aggregate supply curve (SAS) and the long run supply curve (LAS)† (Rossana 81). Figure 1 shows the short run equilibrium of the economy of the UAE. Aggregate demand includes consumption by private economic entities, investments, government expenditure, and net exports (Chamberlin, Linda and Yueh 241). In this regard, the factors that will cause a shift in the AD curve of UAE’s economy include foreign income, income distribution, and fiscal policy, as well as, anticipations concerning future output and prices.Advertising Looking for report on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Foreign income refers to the income earned in UAE’s major trading partners such as the United States of America, Europe, and Asian countries. According to the article, the recovery of the global economy is uncertain. This implies that foreign income will reduce if the global economy continues to deteriorate. Thus, the demand for UAE’s exports such as oil will reduce. As a result, the earnings of UAE’s exporting firms will decrease. This partly explains why the state-linked firms will not be able to rollover their debts if the performance of the global economy worsens. Overall, the decline in foreign income will cause the AD curve to shift to the left from AD0 to AD1, thereby reducing real output from Y0 to Y1. Following IMF’s prediction of economic decline, producers expect demand for their products to reduce in future. Thus, they will reduce investments and production in order to avoid the losses associated with high variable costs and low demand (Rossana 126). Similarly, consumers will associate the expected economic decline with reduced future earnings. Thus, they are likely to reduce consumption in order to save for the future. Consequently, the AD curve will shift to the left from AD0 to AD1, whereas real output will reduce from Y0 to Y1. As firms reduce investments and production in response to the expected economic decline, the â€Å"distribution of income from profit earners to wage earners is likely to worsen† (Minford and Peel 329). Generally, wage earners allocate a larger portion of their income to consumption than profit earners. Thus, allocation of income in favor of profit earners rather th an wage earners will move the AD curve to the left. Finally, the government’s plan to consolidate fiscal policy is likely to involve a reduction in public expenditure. This will lower aggregate demand, thereby shifting the AD curve to the left. The SAS illustrates the response of prices and real output to changes in aggregate demand in the short run (Romer 415). UAE’s short run supply curve will shift due to changes in productivity. The expected economic decline will lead to reduced productivity, thereby shifting the SAS curve in figure 2 to the left from SAS0 to SAS1.Advertising We will write a custom report sample on The Economic Performance of the United Arab Emirates specifically for you for only $16.05 $11/page Learn More Additionally, real output will reduce from Y0 to Y1. If the global economy continues to deteriorate, the prices of UAE’s exports will decline. This will discourage production among exporters, thereby reducing aggr egate supply. Thus, the SAS curve will shift to the left. The expected decline in economic growth will cause the aggregate supply curve and the aggregate demand curve to shift to the left. These shifts are associated with a reduction in real output from Y0 to Y1. As a result, the short run equilibrium of the country’s economy will shift from E0 to E1. Description of the Economic Situation of the Market The expected decline in economic growth will affect both the goods and factor markets. In the goods market, the economic decline can have positive effects for consumers. This is because inflation usually declines when economic growth reduces (Rossana 112). Concisely, economic decline reduces demand for goods and services. Thus, producers and sellers are likely to reduce the prices of their products in order to stimulate demand and to clear their stock of manufactured goods, thereby reducing inflation. In this case, the consumers will have a higher purchasing power than they had before the reduction of the prices. On the contrary, the price reductions will affect the producers negatively. This is because it will reduce their profit margins. In addition, some producers might sell their goods at a loss. The expected economic decline will also affect prices in the factor market. As profits reduce, companies are likely to implement cost-cutting measures such as reducing their workforce. Moreover, companies are likely to reduce their investments in new equipment or borrowing in order to expand their operations (Minford and Peel 215). In this regard, factor prices will fall. For example, wage rates are likely to reduce as companies layoff their employees. Similarly, interest rates, which is the cost of financial capital is likely to reduce as demand for loans declines. The reduction in factor prices will benefit producers by lowering their costs of production. Nonetheless, it will negatively affect suppliers of factors of production. For example, low wage rates will reduce workers’ disposable income and purchasing power. The Right Fiscal Policy Fiscal policy refers to the use of â€Å"government expenditure, taxation, and borrowing to influence the level of aggregate demand, output, and jobs in an economy† (Chamberlin, Linda and Yueh 197). Fiscal policy enables the government to influence the pattern of expenditure and income distribution in its economy.Advertising Looking for report on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Thus, Keynesians believe that fiscal policy has a great impact on consumption, productivity, and job creation in an economy that has an excess capacity. Thus, the government of the UAE should implement an expansionary fiscal policy in order to prevent a recession. An expansionary fiscal policy refers to â€Å"the increase in government expenditure and or a decrease in taxes that usually results into an increase in budget deficit or a reduction in budget surplus† (Chamberlin, Linda and Yueh 210). Justification for Implementing Expansionary Fiscal Policy An expansionary fiscal policy should be implemented because it will enable the government to reverse the economic decline. Concisely, the policy will spur economic growth by stimulating consumption and demand. The unemployment rate in the UAE increased from 3% in 2008 to 4.2% in 2012 (Nyarko 4-15). On the contrary, the country’s inflation rate was as low as 0.7% in 2012. The increase in unemployment rate, low inflation, and the expected reduction in GDP growth suggest that the economy is operating below its potential output. The government can push the country’s real output back to its near potential level by implementing an expansionary fiscal policy that involves an increase in public spending. Government â€Å"expenditure is one of the components of aggregate demand† (Rossana 47). Thus increasing it will result into an increase in aggregate demand. Figure 3 shows the effect of an expansionary fiscal policy on real output. According to figure 3, a rise in aggregate demand due to an increase in spending by the government will move the AD curve to the right from AD0 to AD1. Consequently, the country’s real output will increase from Y0 to Yp. In this case, Yp is the potential output. As the economy moves towards its potential output, the rate of GDP growth is likely to increase. How the Expansionary Fiscal Policy will affect the Economy First, the policy will lead to increased e conomic growth, thereby improving earnings in the private and public sector. Concisely, firms are likely to increase investments and to employ more people in order to increase their production in response to the expected increase in aggregate demand (Rossana 233). In this regard, increased productivity will raise firm profits and the incomes earned by workers. The government can also create employment through the expansionary fiscal policy. For example, it can create thousands of jobs in the construction industry by constructing new roads and schools. Second, an expansionary fiscal policy is likely to be inflationary. Figure 3 shows that prices will increase from P0 to P1 as real output increases after the implementation of the expansionary fiscal policy. A sharp increase in inflation is not desirable because it will reverse the benefits of the economic growth. Concisely, a high inflation reduces consumers’ purchasing power. Thus, aggregate demand will reduce if wages are not raised in response to the increase in inflation (Minford and Peel 316). Similarly, a high inflation will raise the prices of inputs, thereby increasing production costs. If the producers are able to pass the high costs of production to consumers, the prices of various goods and services will increase, thereby reducing demand. However, producers will have to absorb the high costs of production if they cannot share them with the consumers. In this case, firm profits will reduce in response to the high production costs. Nonetheless, the inflationary effect is not likely to be severe because the country’s inflation in 2012 was less than 1% (World Bank). Countries can increase their economic growth rate and create employment as long as they maintain a single digit inflation rate (Rossana 102). Thus, the inflation associated with the expansionary fiscal policy is not likely to be detrimental if it is less than 10%. Third, the expansionary fiscal policy is likely to increase UAEâ⠂¬â„¢s public debt if it is financed through borrowing. In 2012, the country’s public debt as a percentage of its GDP was 40%. Thus, the country is likely to fall into a debt trap if it continues to increase its public debt. A debt trap is a situation in which the government has to borrow in order to pay the interests charged on its existing debts. Countries that have fallen into debt traps often have poor credit ratings due to their limited ability to repay their loans. Thus, a low credit rating will limit the country’s ability to access capital from foreign lenders such as the IMF. High public debt is also not desirable because it involves a redistribution of income from taxpayers to holders of government debt securities (Romer 516). In this regard, it is likely to redistribute income from low-income earners who pay taxes to the rich who invest in government bonds. This is because the interests on government bonds are paid through taxes. Fourth, an expansionary fisca l policy is likely to have a crowding-out effect in the economy if it is implemented through a large deficit spending. In this case, the government will have to borrow a large amount of financial capital from the public in order to implement the policy. Conceptually, the government will be competing with private firms for capital. Consequently, interest rates will increase, thereby limiting the ability of private firms to access credit through the financial and capital markets. The government will have to increase taxes in order to repay the funds borrowed from the public. High taxes in the medium run will reduce consumers’ disposable income (Minford and Peel 117). The resulting reduction in consumption and demand, as well as, limited access to capital will lead to reduced investments. Thus, economic growth will decline. The Fiscal Policy Tools The tools that should be used to implement expansionary fiscal policy are increased government spending and tax cuts. Increased gover nment expenditure can be implemented in the following was. First, the government can increase its transfer payments. This involves increasing expenditure on social security programs such as unemployment benefit, state pension, and grants to students. Transfer payments ensure that every citizen has access to some minimum regular income (Minford and Peel 391). Transfer payments will improve the purchasing power of the poor, thereby increasing aggregate demand and economic growth. Second, the government can expand its current budget on recurrent expenditure. This involves increasing expenditure on public goods such as education and health care. In this regard, the government can increase employment in the education and health sector by hiring more teachers and nurses respectively. Additionally, the government can improve the salaries of workers in the sectors that provide public goods. Provision of public goods also involves expenditure on consumables such as stationery. Thus, aggregat e demand is likely to increase as the government increases its expenditure on public goods. This will lead to improved economic growth. Finally, government expenditure can be increased through capital spending. This involves increasing investments on infrastructure such roads, schools, and hospitals. Capital spending has a great effect on aggregate demand and supply because it stimulates high consumption. For example, construction of new roads will increase demand in the industries that supply construction materials. In addition, construction projects usually create thousands of employment opportunities. This will help the country to address the problem of persistent unemployment. Taxes can be direct or indirect. Direct taxes are charged on employment income and profits. Indirect taxes are levied on spending. They include value added tax (VAT) and excise duties on goods such as petrol. Most residents of the UAE do not pay personal income tax. Nonetheless, corporate tax is charged in most of the emirates. For example, nearly all companies in Dubai pay taxes on their earnings. In Dubai, corporate tax can be as high as 55% (Nyarko 4-15). Generally, most emirates levy corporate taxes on foreign oil companies, petrochemical firms, and foreign banks. These companies pay up to 55% of their operating profits as income tax to the government. Even though most residents of the UAE are exempted from income tax, they usually pay several indirect taxes. For example, municipal taxes of between 5% and 10% are usually levied on revenue generated from entertainment services, hotel operations, and commercial premises (Nyarko 4-15). In addition, most imported goods are subject to an import duty of up to 5%. Thus, the government can still implement the expansionary fiscal policy by reducing indirect taxes that are levied on consumption. For example, a reduction of taxes on entertainment and hotel rooms can lower the cost of staying in hotels. Consequently, hotel occupancy will inc rease, thereby raising the income of hotel owners and securing jobs in the hotel and restaurant industry. In addition, the government can reduce the corporate taxes that are paid by foreign oil and bank companies in order to improve their earnings. Lower taxes will enable these companies to allocate a better part of their earnings to investments rather than paying taxes. This will increase their productivity, thereby promoting economic growth. Impact of the Fiscal Policy Tools in the Economy Increased Government Expenditure Increased government spending will benefit the economy in the following ways. First, capital spending will lead to an increase in the total assets of the state. In particular, it will lead to expansion of the infrastructure that is necessary for the growth of businesses in the country. For example, the expansion of roads and railway systems will improve efficiency in transportation. The resulting reduction in the cost of transportation will reduce the overall cos t of producing goods and services in the economy. According to figure 4, a reduction in the cost of production shifts the aggregate supply curve downwards, thereby increasing real output from Y1 to Y2. This shows that investments on infrastructure that support economic activities will lead to high economic growth. Furthermore, foreign direct investments are likely to increase if capital spending is used to expand the country’s infrastructure. For example, more airlines are likely to operate form Dubai if its airport is expanded. This will create more jobs and spur economic growth through increased consumption. Second, provision of public goods and services such as education and health care will have positive supply-side effects in the economy by improving the quality of the country’s human capital. For example, funding higher education through grants to students will enable more people to improve their technical skills. People with high academic qualifications are like ly to be highly productive because they have the knowledge and skills that are necessary for achieving innovation (Al-Khateeb, Darrat and Elkhal 297-306). Similarly, spending on youth apprenticeship programs will enable fresh graduates to gain adequate job experience, thereby improving their employability. Concisely, it will enable the government to improve the competitiveness of the youth in the job market in order to reduce unemployment in the country. Similarly, expenditure in the health care sector will improve the health status of the citizens, thereby improving their productivity. Third, expanding social safety net programs is an effective way of improving the incomes of the poorest people in the country. By 2012, nearly 10% of the population of the United Arab Emirates was living in poverty (World Bank). Improving the income of the population living in poverty through transfer payments will boost consumption. The resulting increase in demand for goods and services will encour age producers to increase their output through new investments. Transfer payments are also a means of income and wealth redistribution in the economy. This is because transfer payment programs are financed through taxes, which are often paid by the rich. The benefit of redistributing income from the rich to the poor is that it enhances equality in the economy. Additionally, reducing income disparity reduces the chances of social unrests, which can hinder productivity and economic growth. Tax Cuts Tax cuts will affect the economy in the following ways. To begin with, reducing corporate tax will enhance investment in the economy. The oil and gas sector contributes approximately 31.3% of the GDP of the United Arab Emirates (Nyarko 4-15). Nonetheless, companies in this industry, especially, the foreign ones pay nearly 55% of their operating profits as taxes. This reduces the amount of funds that firms in the industry can allocate to investments and expansion. According to the article, r educed production in the oil and gas industry is one the factors that were expected to slow the country’s economic growth. However, productivity in the industry can be improved by lowering taxes in order to enable firms to allocate a large portion of their earnings to investments. For instance, firms in the industry can focus on oil exploration, thereby increasing the country’s oil and gas output. Any small increase in productivity in the oil and gas industry is likely to have a great multiplier effect in the economy. This is because the industry employs thousands of people and supplies oil, which is the main source of energy for production in the country. Lowering taxes is also likely to attract foreign direct investments in the country. Foreign investors often invest in countries that provide tax incentives so that they can improve their earnings. An increase in foreign direct investments will have a powerful demand-side effect in the economy. Concisely, the consumpt ions associated with new investments by foreign investors will increase the demand for various goods and services in the economy. The increase in demand will encourage producers to increase their output, thereby increasing the country’s GDP (Rossana 88). Finally, reducing the level of compulsory pension contribution will improve the purchasing power of the citizens. Concisely, a reduction of the compulsory contributions will enable the citizens to have a high disposable income, which will enable them to purchase more goods and services. Impact on Macroeconomic Indicators The article highlights three important macroeconomic factors, which have implications for the country. These include the expected reduction in GDP growth, planned fiscal consolidation, and uncertain performance of the world economy and financial markets. These factors will affect the country’s unemployment and output in the following ways. Output The forecasted reduction in economic growth means that t he country’s output (measured by GDP) expanded at a slower rate in 2012 than in the previous year. Expectations concerning future decline in economic activity usually influence production decisions. Producers and investors associate a reduction in the rate of economic growth with a decline in profits or corporate earnings (Romer 477). Thus, they are likely to reduce their output in response to the expected decline in demand as the economy slows down. In this regard, expectations of a decline in future earnings will lower the country’s output. The country’s output is also likely to decline if the global economic environment continues to deteriorate. Concisely, poor performance of the world economy will reduce the demand for the country’s main exports such as oil. Thus, UAE’s exporters will reduce their output in response to the low demand for their products. Similarly, uncertainty in the global financial environment will limit the ability of UAEâ₠¬â„¢s firms to access credit from foreign markets. This will limit investments and reduce the country’s output. Fiscal consolidation involves implementing strategies that enable the government to reduce its budget deficit and overall public debt (Rossana 121). Thus, fiscal consolidation involves a reduction in public spending by the government. Reducing government expenditure is essentially a contractionary fiscal policy. According to figure 5, a reduction in government spending will cause a shift in the aggregate demand curve to the left, thereby reducing real output from Y0 to Y1. Thus, fiscal consolidation is likely to reduce the country’s output. Unemployment Unemployment is a lagging macroeconomic indicator because it usually takes time to respond to a change in GDP growth. Thus, the country’s unemployment rate may not change significantly in the short run as the economy slows down. Reducing the workforce in response to falling demand and hiring new employe es as economic activity improves usually involves high costs. Thus, firms are likely to retain their employees in the short run even if the rate of GDP growth is reducing. In this case, the unemployment rate may not increase by a big margin. Okun’s law suggests a negative long run relationship between unemployment and GDP growth (Chamberlin, Linda and Yueh 245). Thus, if the country’s economic decline persists for a long time, unemployment rate will increase. This is because firms will opt to reduce their workforce in order to avoid high fixed costs. According to Okun’s law, the rate at which new jobs are created depends on the rate of GDP growth. Thus, a reduction in the growth of the country’s GDP will slow the rate at which new jobs are created. Hence, the problem of high unemployment will persist. Conclusion The IMF expected the rate of GDP growth in the UAE to decline from 4.9% in 2011 to 2.3% in 2012. This decline was attributed to the countryâ€⠄¢s limited capacity to increase oil production and uncertain global economic environment. The country’s government can stimulate economic growth by implementing an expansionary fiscal policy. In particular, it should increase public spending and reduce taxes. An expansionary fiscal policy is appropriate because the country has a low inflation rate, whereas its unemployment rate is high. Additionally, the policy will stimulate demand, thereby increasing the rate of GDP growth. Nonetheless, an expansionary fiscal policy is likely to be inflationary. Moreover, it can crowd-out investments in the private sector and increase public debt if it is financed through large-scale borrowing. In this regard, the government should also implement policies that will prevent high inflation and the crowding-out effect. Appendix Figure 1: AD-AS Model (shift in AD curve) Figure 2: AD-AS Model (shift in SAS curve) Figure 3: Effect of expansionary fiscal policy Figure 4: Effect of reduced prod uction costs Figure 5: effect of fiscal consolidation Al-Khateeb, Faisal, Ali Darrat and Khaled Elkhal. The UAE Growth Surge: Have Information Technology and Human Capital Contributed? Studies in Economics adn Finance 24.4 (2007): 297-306. Print. Chamberlin, Graeme, Linda Linda and Yi-Chuang Yueh. Macroeconomics. New York: McGraw-Hill, 2006. Print. Minford, Patrick and David Peel. Advanced Macroeconomics. New York: John Wiley and Sons, 2002. Print. Nyarko, Yaw. The United Arab Emirates. Business. New York: UNU-WIDER, 2013. Print. Romer, David. Advanced Macroeconomics. New York: McGraw-Hill, 2011. Print. Rossana, Robert. Macroeconomics. London: Oxford University Press, 2011. Print. World Bank. UAE Economic Indicators. World Bank Group, 31 Dec. 2012. Web.