Question

All though all countries throughout the world have to face similar economic problems the economic system they adopt as a means of dealing with them will differ. Essentially there are three approaches to tackling the economic problem of allocation, distribution and utilization of resources. Comment on all the three approaches and reason out which approach will work out in UAE as a country.

Answer 1

There are three approaches to solve central economic problems like allocation, distribution and utilisation of resources of any economy. They are price mechanism in capitalist system, centralised planning in socialist system, both price mechanism and centralised planning in mixed economy.

In the case of capitalist economy, it is the price mechanism or laizzes fair economics or demand and supply rules that resolves all issues of allocation distribution and utilisation of resources. All resources are produced, distributed and consumed according to the basic demand and supply rules here.

In the case of socialist economic system, price mechanism is replaced by central planning. That means in every socialist economic system there must have a central Planning Commission or authority to take decisions about what to produce, how to produce and for whom to produce . Also, returns to the various factors like land labour capital and Entrepreneurship ( rent wedge interests and profit ) are also being fixed by this Central authority.

In the case of mixed economic system there must have Central Planning Commission as well as price mechanism simultaneously to solve central economic problems. Mixed economy allows Central Planning Commission to develop and implement various decisions about crucial sectors of the economy. It also allows the price mechanism to resolve the rest of  economic issues prevailing in the economy.

In countries like U A E, mixed Economy works more better. Like every other countries of the world either central planning or price mechanism alone could not solve all issues of the economy.

UAE as 2nd largest economy in the Arab World after Saudi Arabia, having major contributions from Industrial and service sectors to the GDP could not resolve all central economic issues by either Central planning or by price mechanism alone.Because one third of its GDP is coming out of oil industry. How can UAE leave this sector to price mechanism alone while oil is a fossil fuel and natural resource which is non renewable and may end one day.

So intelligent Central planning is very much essential to solve economic problems of UAE and to lead the economy towards new heights.