Economics Final Project

Done by:
Abdulrahman Abdullah Dhabaan
62210226

Supervisor:
Dr.Kamal Tamim

2022
 1. Yemen central bank roles in economic development.

In General, banks can play a very useful and important role in the economics of every
country as they control a lot of money which may influence and change the character of the
people in any country. The Central Bank of Yemen is an independent body influences economic
development in through some policies and strategies which can be implemented in the normal
situation:

• Use interest rates to curb inflation.

Yemen Central Bank acts as a buffer between money supply and demand; the price level is
the result of this imbalance. A lack of money supply will harm the economy, while an excess
will result in inflation. Due to the current circumstances, the Yemeni economy is worsening,
requiring the Yemeni government to increase its expenditure in order to maintain sustainable
economic growth; as a result, the Yemen Central Bank is under pressure to issue more
banknotes. Thus, leading to an inflation.

However, low inflation rate can also have an adverse impact on economy and also affects the
interest rates applied. This will continue to raise the general price level of the economy. Both
very high and very low inflation can have a negative impact on the economy. Therefore, the
central bank's main task is to keep inflation and interest rates at moderate levels. This is
because interest rates play an important role in keeping inflation at moderate levels.

• Exchange Rate Issue.

It stabilizes the exchange rate of the local currency and promotes investment, export, import
and economic growth. In a stable pricing environment, companies can allocate resources
more efficiently and have a well-functioning financial system to make informed consumption
and investment decisions. Nowadays, Yemen is considered as non-preferable economy for
 investors to invest in. The exchange rate of the Yemeni Rial against US Dollars and Saudi
Rial (SAR) is getting worse from 2014 till now due to war. These days it is very hard to
maintain a stable exchange rate as there two different bank notes with two different central
banks along with two governments and two exchange rates. For instance, the exchange rate
in northern areas against US Dollars is 600 YER per dollar while in southern areas the rate is
1500 YER per dollar. But the Yemen Central Bank before 2014 had a stable exchange rate
with a small fluctuation rate due to no unpredictable external factors such as war.

• By controlling interest rates and reversals and stabilizing exchange rates, this actively
directs credit to specific industries that help drive economic growth.

• Monitoring and development of national payment systems that enable transactions to be

completed safely and in a timely manner. It supports the day-to-day operations of the
economy and tends to process transactions in financial markets. This is especially true
today, when payments are processed electronically on a large scale.

• In a strong dollar economy, central banks have stable prices as people shift most of their
money between the dollar and Yemen's Reyal, which can lead to more volatile demand
and exchange rates for Yemen's Reyal. And the effect of promoting economic growth is
low.

• The most important role to be discussed recently is whether the central bank is
independent of the government. It was recognized that central banks could play an
important political role in establishing national sovereignty and unity.

The above strategies and policies have widespread impact. The independence of the Yemeni
Central Bank mainly means that the central bank should not be exposed to government pressure
to fund government activities. Yemen Central Bank plays an important role in economic
development. However, due to the unstable situation in Yemen, the Yemen Central Bank is
unable to control or develop the economy at this time. Yemen's economy will be unable to
develop unless the ongoing conflict is resolved.

2. The impact of cost over local and international economies.

It’s very beneficial for each business enterprise to calculate the fee of its services or products and
notice what's the affects elements which can have an effect on the fee to be able to result in the
effect over the neighborhood and global economies. In the subsequent lines, will discover greater
how the fee effect:

• Transportation cost:

By growing the ability of the business enterprise and lowering the prices of mobility will assist a
developing proportion of the sources fed on through the financial system particularly if the
business enterprise is buying and selling internationally (More exports than imports). But if the
rate of the neighborhood manufacturers is better than the arena rate, business enterprise will shift
to imported merchandise. Similarly, if the rate of neighborhood merchandise is lower, business
enterprise could alternatively export their product and promote it at the better global rate.

• Inflation:

High inflation with-inside the united states purpose the prices raise, end result a falling in
deliver. This will result in human beings having lesser cash to spend on items and services (much
less demand). On the opposite hand, a fall in inflation and hobby quotes will make prices
cheaper, end result boom and the cash deliver may also boom. With a upward thrust within-side
the cash deliver, human beings could have extra money to spend on items and services
(excessive demand).

• Exchange Rate:
Can play a prime element in affecting the value over the world. For the ones groups which
alternate internationally, the trade within side the alternate price modifications may be a actual
task for them. At the equal time, a upward thrust with inside the alternate price makes imports
cheaper. If the organization desires to import uncooked materials, an appreciation can lessen the
value of production.

• Technological change:

Can decline within side the transportation value and different fees and result in direct growth
modifications over the neighborhood and worldwide economics.

• Political and financial risks:

Can immediately have an effect on the value of services and products to be able to have an effect
on the boom of worldwide alternate for groups with overseas operations via way of means of
growing or reducing the alternate over the world. The strong international locations with few
rules can produce merchandise or offer offerings with low value to be able to lead for increasing
the worldwide international alternate.

• Competitiveness:

That’s a degree of the relative cap potential of various international locations to offer one of a
kind value of services and products. Level of fees display the benefit of doing enterprise and
growing /reducing the aggressive international locations (internationally) or groups (locally) to
be able to generally tend to gain a better degree of worldwide alternate.

• Globalization:
Cost impacted the neighborhood economies to end up included with every different via way of
means of growing the capital flows and decreasing the alternate barriers. Gradually, the ones
neighborhood marketplace can be capable of end up worldwide markets then attain the
globalization.

Thus, the change in the products’ and services’ price over the time, strongly have an effect on the
alternate domestically and across the world via amplify the organization in some of direction
(countries) and use a comparable technique to force measures of alternate price from opportunity
countries.

3. The level of competition between local and international economies in

different market structure.

Competition is basically the mechanism for businesses to interact, communicate, and compete
for the best chances for their products and to meet the needs and desires of prospective
consumers.

Many governments fear that local enterprises will be powerless in the face of international
competition; therefore, they establish trade barriers to reduce this pressure. However, the more
pressure multinational corporations apply to local enterprises, the greater the competition, which
drives up productivity for local firms and so improves consumer living standards. This also helps
the economy of the country to boost.

As each market has a different goal, the amount of rivalry in local and international markets
differs. The goal of international companies is to achieve a high level of competitiveness at the
corporate, regional, national, and global levels. Local companies, on the other hand, are
primarily concerned with achieving a high level of competitiveness at the company and national
levels.
There are several market structures that have an impact on the market. Each of these market
structures can be used by businesses.
The following are the market structures in the economy:
(1) Perfect competition
(2) Monopolistic Competition
(3) Monopoly
(4) Oligopoly
These are the four primary types of market structure.
The number of productions, the price power of the firm, the obstacles to entering a new firm, and
the extent of non-pricing contests all differ. These factors can have a positive or negative impact
on a company's profit margins, whether on a local or international basis. These market structures
help us to have a better understanding on how firms make decisions.

• Perfect Competition:
The term perfect competition refers to a theoretical market structure. In a perfect competition
model, there are no monopolies.
It is where many small enterprises compete with each other and no company has market power at
this point and may affect the market price. The price is determined by the market which means in
this case the firms are price takers
(i.e., it must accept the equilibrium price at which it sells goods). In perfect competition there are
several assumptions such as all companies aim is to maximize their profits.
There is free entry and exit to the market, that all companies sell goods that are completely
identical (i.e., homogeneous products), and that there are no consumer preferences over any
product, meaning that he considers all products to be similar. However, perfect competition has
its disadvantages such as lack of innovation, no economies of scale and profit margin is limited.
Some examples of local perfect competition are cultural food restaurants. Internationally like
stock exchange market.
 • Monopolistic Competition
Monopolistic competition characterizes an industry in which many firms offer products or
services that are similar (but not perfect) substitutes. Barriers to entry and exit in a monopolistic
competitive industry are low, and the decisions of any one firm do not directly affect those of its
competitors. Monopolistic competition is closely related to the business strategy of brand
differentiation.

Demand in monopolistic competition is highly elastic due to the wide range of identical goods.
To put it another way, demand is extremely sensitive to price changes. Moreover, firms that are
in monopolistic competition are price makers. Examples of monopolistic competition in Yemen
are hair salons. Internationally we can use the example of fast-food restaurants such as KFC and
McDonalds. Also, we have the cereal products which are many brands but the taste is slightly
different.

• Monopoly:
The monopoly refers to a market structure where only one company is selling the goods or
services in the market. There are no competitors, high barriers to entry, no closer substitutes
which makes them the only sole provider.
The characteristics of monopoly are that they are price makers as there is no fear of competition
undercutting their prices. A monopoly has the power to raise prices at any time.

Monopoly can be an advantage for the firm but is considered a disadvantage for the consumers
as they have no substitutes. Many governments discourage having monopolistic firms in their
country. Example of a monopoly in Yemen is the YEMEN NET which is the only internet
service provider and it is regulated by the government. Internationally we have like Microsoft
company.

• Oligopoly:
An oligopoly is a market structure with a small number of firms, none of which can keep the
others from having significant influence. (4) In oligopoly firms can either compete or cooperate
with each other. They will be able to use their collective market power to raise prices and
increase profits.
The oligopoly market's structure is based on the following assumptions. Profits are maximized
by all businesses. Similarly, oligopoly can set prices. In the market, there exist barriers to access
and exit. There are only a few enterprises that dominate the market, and products can be
homogeneous or distinct.

NOTE: Non-price competition is another type of competition that has been popular in recent
years. Firms can differentiate their products without using price or a distinct product through
non-price competition. This condition only applies to oligopolistic and monopolistic
competition; they employ no-price competition to differentiate their product from other
competitors, whether they are competing locally or globally.

In conclusion, depending on whether the market is a monopoly, oligopoly, monopolistic, or

perfect competition, each market structure has a distinct number of buyers and sellers. The
product's similarity and differentiation are also determined by the market structure. Local
products are gaining footing in several marketplaces, even if international enterprises continue to
lead in a number of product categories. This emphasizes the fierce rivalry for consumers'
attention.

4. List of advices and recommendation that should be provided to the

government.

As the economy nowadays in Yemen is in recession so the following are some recommendations
to the government:

• Lower Interest Rate of Banks

The government can reduce the interest rate applied by the banks so people can take their
deposits. When people will start taking their deposits eventually, they will start opening new
small businesses which will lead to hiring people for the sake of the business. Hiring means
providing wages and salaries for employees. When employees will receive wages or salaries it
means spending which then starts the economic cycle.

• Recall the extra liquidity from the market

If there is extra liquidity in the market like the damaged currency. The bank can retake it and
destroy or recycle it all and let the liquidity short. So, this will create a demand and then this
demand will lead to currency appreciation against foreign currencies.

• Applying Restrictions on currency exchange institutions

The government can apply restrictions on currency exchange institutions as these days they are
the one who are manipulating with the exchange rate like demanding higher deposits in central
bank as a guarantee or making them decrease the liquidity available. These restrictions can help
with the currency exchange rate fluctuations and affecting the demand and supply of local and
foreign currency.

• Reduce Bank Panic

As these days the trust in Yemeni banks are nearly zero and banks are considered to play a vital
role in economic cycle. So, banks should regain their trust with employees by making consumers
withdraw their time deposit. This will make depositors regain their trust on banks because if
liquidity is available and can be withdrawn anytime not all the depositors will take their money
bank. They will keep the money in order to benefit from the interest rate on deposits.
References: