3. Saudi budget surplus: cyclical or structural?

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Expert Solution

A budget surplus, is said to happen for an economy, when the total income earned is higher than its overall expenditure. This is a good situation to be in for any economy, as the currency then is higher in value and the economy grows rapidly.

Consider this like a simple business. As long as the business makes a profit, it has sufficient capital to reinvest in different sectors and grows considerably. Same is the case with a budget surplus. It allows the country to grow in size and to invest in numerous sectors and increase employment opportunities for itself.

Surplus can basically be categorized into two categories these are cyclical or structural. When the demand for a good or service in the international markets which the economy produces, suddenly is very high, the net result is that the exports may increase in comparison to the imports. However, this happens for a very short period of time and then usually the demand goes down. Such type of surplus is known as cyclical surplus wherein the demand for a countries goods goes up significantly for a small amount of time.

On the contrary, a structural surplus takes place, when the economy produces something which it has an advantage in producing or is extremely scarce as in the case of Saudi Arabia which manufactures oils, for which it has large reserves and the country is capable of manufacturing at the best possible cost of production.

As the entire globe depends on it for oil needs, the country can be said of having a structural budget surplus, wherein the exports would always exceed the imports regardless of the business cycle as the entire world economy has a great demand for the same.

Thus, we can conclude by saying that Saudi Arabia is an oil rich country with high level of exports and it delivers this to the entire world economy at the best possible cost. This creates a surplus which is not cyclical but is structural in nature.

Please feel free to ask your doubts in the comments section if any.

Rahul Sunny answered 6 months ago

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