How Useful Is Okun’s Law, Essay Example

The most pronounced classifications of Saudi Arabia consumer price index are reflected by foodstuffs together with beverages that account for 26% of the total weight, water, rent, fuels as well as renovations accounting for 18% and telecommunication together with transport that account for 16% of the total weight. Other categories engross the home furnitures accounting for 11%, clothing, footwear as well as fabrics, accounting for 8%, entertainment and learning accounting for 6%, healthcare accounting for 2% and miscellaneous services as well as expenses accounting for 13%. The rate of inflation has in Saudi Arabia has increased dramatically thus leading to the escalating living cost and consequently raising some complaints from the population. According to the perceptions of the nongovernmental organizations, the real rate of inflation is Saudi Arabia is actually substantially higher relative to the official rate. According to the Consumer price index (CPI) entails a measure of the overall level of prices coupled with a measure of the overall cost of goods and services that are experienced by a typical consumer

The items in the basket used to measure CPI in Saudi Arabia (Abel & Bernanke, 45-56).

Foodstuffs, beverages, water, rent, fuels, clothing, footwear as well as fabrics are the most crucial items in the basket used to measure CPI in Saudi Arabia. The most important consideration in items with respect to measure CPI in Saudi Arabia include the following

• Fix the basket that implies which prices are most important to the typical consumer and the different weight  of the food basket
• Finding the prices at each point in time
• Computing the basket’s cost considering same basket of goods and isolation of the effects of price changes

Choice of a base year and computation of the CPI

Base year is equal to benchmark with the following considerations

1. The price of basket of goods and services in current year
2. Divided by price of basket in base year
3. Times 100

The difference of the items in the basket used to measure CPI between Saudi Arabia and USA

In Saudi Arabia, the GDP and the entire economy in that respect is based on the consumption of items at the household level. The situation is however different in the United States. The US has the dollar that is a currency with the greatest demand in global business transactions. The dollar is also the global primary reserve currency. The abundancy in resource availability in the United States and infrastructures that are fully developed makes the country privileged in terms of GDP. Productivity is also substantially high and the country is also an influential global financial market (Knotek, 73–10).

Historical trend of inflation rates and its possible reasons

An extremely high growth rate has been witnessed in Saudi Arabia over the last ten years. In consideration of the nominal perspective, the country experienced growth rate of 13.4% during the time period of between 2004 and 2013, however, the realistic growth rate was documented as 6.3%. The disparity between the nominal and the real growth rate is the inflation since the actual worth of the GDP is responsible for holding GDP to the base year. Likewise, the nominal value implies to the GDP of the existing terms. This therefore translates to a high degree of inflation in the country’s economy which is attributable to the huge disparity between nominal figures and the real values. In addition, more than half of the existing growth points out at inflationary factors.

The cost of living in Saudi Arabia now versus 20 years using CPI data

The economy of Saudi Arabia has been documented as being the most robust on an international context. Saudi Arabia has also been among the G-20 best performer economies in the near past based on the reports of IMF. The rate of growth in Saudi Arabia GDP was classified in a third position after the economies China together with India. The yearly growth rate on average was documented at 6.25% during the time period between 2008 and 2013, based on an IMF report of 2013. There was also a simultaneous decline in public debt from 37.3% to 2.7% between the time periods 2005 ad 2013. This was considered as a outstanding achievement, the cost of living has however remained high because, despite such enormous achievements, inflation has persisted at high levels, being 4.17% during the time era of between 2007 and 2013. The major problems that are associated with inflation are worst experience on reflection on the major divisions that affect the cost of living (Gordon, 67-78). These include things like the foodstuffs, electricity, housing, water and non-alcoholic beverages. The escalating cost of living has been at the center of debate among the populations in Saudi Arabia, who have also received immense support from the nongovernmental organizations. In fact, the real rate of inflation is higher compared to the official inflation rate. For instance, based on a recent research that was conducted in 2013, the increase in the cost of living was projected at 31%. At the same time, the rate of growth in wages was far much slower as compared to the cost of living.

Works cited

Abel, Andrew B. & Bernanke, Ben S. Macroeconomics (5th ed.). Pearson Addison Wesley, 2005.

Gordon, Robert J., Productivity, Growth, Inflation and Unemployment, Cambridge University Press, 2004.

Knotek, Edward S. “How Useful Is Okun’s Law.” Economic Review, Federal Reserve Bank of Kansas City, Fourth Quarter, 2007.