This thesis intends to evaluate, theoretically and quantitatively, existing studies related to the absorptive capacity of the Saudi Arabian economy. In our study, we put forward a new approach to understand the concept of absorptive capacity _ one which takes into account the special characteristics of oil-based economies in building a macro-economic model. We define absorptive capacity as "the ability of the economy to absorb, and utilize oil-revenues effectively, within a given period." Such utilization will be for consumption, investment and trade. Our approach is quite comprehensive since it considers all sectors in the economy. The Saudi economy with its unique feature represents an interesting development pattern, where the problem is not capital scarcity but capital abundance and its effective utilization. We believe that this criterion alone mandates a new development model, a task that we have tried to fulfill in this study. Our study aims to examine the success of the Saudi economy in utilizing oil revenues to expand its absorptive capacity and in accelerating the process of diversification of the economy. Accordingly, an econometric model has been formulated and the statistical results have been presented. The simulations exercises are designed to test the validity and stability of the model. The study also provides a forecast for the absorptive capacity of the Saudi economy until 2000. A comparison between our projection and the government's estimation for the Fourth Plan (1985-1990) is also presented. On the basis of the available statistical criteria, the performance of our model could be regarded as very satisfactory. We hope that the policy implications derived from this empirical investigation will be helpfull as guidelines in formulating future policies for providing sound and stable growth of the economy.