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Background information

Algeria, the second largest African state and tenth largest country in the world, lies in the northern part of African continent, with four-fifth of its land being a desert. The country's government administrative offices are in Algiers, which is also its capital city and the core economic hub. Other major cities in Algeria include Oran, Constantine, Annaba, and Blinda. The country has a democratically elected government; however, the military has powerful influence in the country's politics. The official language in the country is Arabic; however, French is widely used by middle class citizens and in business, more so due to the fact that the country was colonized by France (O'Regan, 2003, p.63).

About 70 per cent of the population is predominately of Arabian origin and the rest are Berbers. Further, Islam is the common religion, while culture and Islamic values are entrenched in social and in organizations. With a population of about 32 million, over 42% of this population lives in urban areas, with the biggest number living in the Mediterranean area of the country (O'Regan, 2003, p.63). The population growth rate is estimated to be 1.22 percent and general life expectancy of the population is about 73.26 years. Furthermore, the median age for the population is 27.6 years. In terms of literacy, the education level in Algeria is relatively low, with only 6.6% of the population having attained higher education. However, although most of the population has basic literacy level which is attributed to free and compulsory basic education for children under age of sixteen, disparity is always evident, with women being the most illiterate. Economically, levels of income obtained in Algeria are better than most lower and middle-income countries; for instance, "in 1995 the purchasing power parity in Algeria was $ 5,300 per person which was among the best rate among LMI countries" (Aghrout and Bougherira, 2004, p.36).

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Despite Algeria being a large nation, only 3 per cent of its land is arable, with the rest lying in the desert. The climatic condition in Algeria is that of semi-arid, with constant spells of drought; however, areas on the costal plain have Mediterranean climate. The country has a mixed geography with a large portion falling in the Sahara dessert region and a long coastal line along Mediterranean Sea in the north. Nevertheless, the country is endowed with many natural resources, with oil and natural gas being the country's food basket.

Size and structure of Algeria Economy

The Algerian economy is socialistic, with government dominating key sectors of the economy and foreign trade. The economy is a closed one with strict controls on the foreign and private investments. Primarily, the economy of Algeria depends on export of natural gas and other hydrocarbons extracted from the country. Its low-to-medium-size economy is fueled by mining industries and exports from these industries. Indeed, its oil sector generates about 39 percent of the GDP while manufacturing generates nine percent (Aghrout, Bougherira, 2004, p.37). The manufacturing sector has declined significantly in the recent past; only production of building material sector has escaped the decline. In spite of harsh climatic condition, Algeria has an agricultural sector that contributes 11-12 percent to GDP and employees approximately 22 percent of the labour force. The government's saving are relatively high since it has lower private and government consumption. Thus, the government has been able to allocate large shares of expenditure to investment.

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This African state made steps towards achieving microeconomic stability and has developed a private sector oriented economy (Lopez-Calix, Walkenhorst & Diop, 2010, p.64). Thus, Algeria has attracted a large number of foreign direct investors in the country in the last decade. The public sector role in the economy is large and it continues to expand. Generally, the Algerian economy is characterized by poor performance in manufacturing and agricultural sector, and high levels of national debts and unemployment rates.

However, the Algerian economy is not properly integrated into the world's economy. Further, the economy relies on European export hence it is vulnerable if there is a shift in access to the market. Moreover, the country's non-oil exports are very low, with no prospect of growing in the future.

Trade relations

Algeria has developed both horizontal and vertical trade links; horizontal links are trade relation with countries with comparable development levels while vertical trade links are trade relation with more developed nations (Aghrout and Bougherira, 2004, p.73). Algeria relies heavily on vertical trade relation especially with European nations; two thirds of Algeria's exports are sold in Europe. Algeria trade relation with the European Union has helped the country's economy to be integrated into the world's trade system. Moreover, this integration is essential in development of Algerian economy. Through this relation, the EU is assisting Algeria to promote trade liberalization, and raise industrial standards. Moreover, the relation supports harmonization of norms and standards through offering financial and technical aid. Therefore, the Algerian economy has undergone restructuring and diversification over the years (International Monetary Fund, 2006, p.7).

Since the inception of the Euromed partnership, bilateral trade volumes have increased significantly by 9.3% between 2003 and 2009. Further, FDIs have also increased from European nation due to favorable trade relations. The UK is one of the largest sources of foreign direct investment in Algeria of the EU member states. To make this relationship work, the government of Algeria has eased import barriers on imports from EU nations through creating of free trade area. Algeria on the other hand is able to expand its market share, as it enjoys zero tariffs on exports of manufactured goods to the EU (International Monetary Fund, 2006, p.4).

Economic problems

The unemployment rate is considerably high, estimated to be 29 % especially among the youth of the nation (Jolly, 2003, p.206). Therefore, there is underutilization of the available human resource capital. The problem of unemployment can cause national discontent, resulting in instability in the country.

For some time, the exchanged rate has been maintained at 0.2 dollar or higher, which is an overvaluation. Thus, overvalued exchange rate depresses export of non-oil products and production of import substitutes. The real exchange rate has varied over time but there are no significant signs of misalignment (International Monetary Fund, 2007, p.76).

The exchange rate in Algeria is managed by float hence more stability. The government of Algeria has managed to create price stability hence controlled inflation rates. Indeed, the real effective exchange rate of the Algerian dinar has remained close to the equilibrium level. There is a potential inflationary pressure due to the government's expansionary fiscal policy, which has led to excess liquidity in the banking sector. Besides, the country's importation has swelled, raising the trade balance, thus resulting in altering equilibrium of the country's external accounts. With increase of inflationary pressures, the central bank of Algeria will be compelled to raise interest rates, which will translate to increased operational costs.

The government reformed the regulation of interest rates by eliminating preferential treatment for some sectors and replaced it with uniform rate for all people (Nashashibi & IMF, 1998, p.36). Moreover, the change of exchange rate regime from pegged to managed float has allowed flexibility in case of drastic shocks. Interest rate is an indicator of a country's competitiveness and profitability.

Assessment of the future potential of Algeria

Foreign companies in Algeria encounter unpredictable legal frameworks and complex bureaucratic systems. State dominance over the economy, corruption, and bureaucracy continue to hamper further development and diversification of the economy. To establish a business that is not related to oil or hydrocarbon sector in Algeria is not a viable venture. In spite of the risks in Algeria, the returns from oil and hydrocarbon exploring are huge, hence overwriting the risks involved. Moreover, trade relation between Algeria and the European Union has restructured the business environment especially in manufacturing sector. Subsequently, Euromed agreement has facilitated to creation of free market zone, which have minimal trade barriers. Since the nation of Algeria has large market share for its energy product, energy based business will not lack market for its products.

The government seems to focus in restructure trade of oil and hydrocarbon at the expense of other sectors. Therefore, non-oil business venture will not benefit from some preferential treatment given to oil business i.e. tax breaks and lower entry barriers. Moreover, the problem of unemployment can affect businesses to establish in Algeria in the long run.

Conclusion

Despite the risks in Algeria and the prevailing macroeconomic factors, there is a great potential of creating competitive and profitable business in the oil and hydrocarbon sector. Trade relations formed i.e. Algeria-EU or Euromed relation will facilitate proper running and high standard businesses in future. Besides, the government has controlled and ensured financial stability.

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