Economics 10 Assignment: Analysis of Malaysian Economy and Inflation

This economics assignment solution analyzes the Malaysian economy, focusing on trade, inflation, and the impact on various sectors. Part A explores Malaysia's trade dynamics, the impact of the ringgit's decline, and the significance of the service and automotive sectors. It also examines the oil and gas industry's influence on exports. Part B delves into inflation, distinguishing between demand-pull and cost-push inflation, and assesses their effects on businesses and investors. The assignment highlights the economic factors shaping Malaysia's trade, the consequences of inflation, and the importance of key sectors for economic stability and growth.

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Part A:........................................................................................................................................2
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................3
Answer to question 3:.................................................................................................................4
Answer to question 4:.................................................................................................................5
Part B:.........................................................................................................................................6
Answer to 1:...............................................................................................................................6
Answer to question B:................................................................................................................7
Part C:.........................................................................................................................................9
Answer to A:..............................................................................................................................9
Answer to question B:................................................................................................................9
Reference List:.........................................................................................................................11

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Part A:
Answer to question 1:
For Malaysian economy trade forms a sizeable part of the output as over the last
fifteen years the exports of products and services averages greater than 100% of the GDP
which ultimately results in sustained trade surplus (Taussig and William 2013). This cushion
of overseas reserves has enabled the government to run continuous budget deficits by
simultaneously maintaining a current account surplus. Nevertheless, being Malaysia an
export concerned economy, it is has transformed from excessively dependent on the electrical
and electrical products chain to hydrocarbon concentrated industries with mix of products
which is exported by Malaysia has turned out to be more volatile, resulting the nation to
international market sentiments.
The electric and electrical products have continued to contribute a significant portion
of the total amount of exports for Malaysia, however in the recent decade there has been a
larger divergence in the structure of the export products (Sloman et al. 2013). In the recent
years there has been an increase in the share of non-electrical and electric production with
exports rising from 23.4% to 33.8%. During that same time, the portion of commodities in
the total amount of exports has augmented from 13.3% to 22.2%. Electrical and non-
electrical products have from a very long time been the heart of the nation strategy of trade
with the bellwether segment rising increasing to highest during the year 2000, when it only
comprised of only 60% of the total amount of exports (Bernanke et al. 2015). Ever since
then, there has been a steady decline in the relative terms of the electrical and electric trade,
which ultimately fell to one third of the entire export over the last four years.
There has been a remarkable growth in the natural gas industry with the commodity
has comprised of marginally over M$ 13bn or 3% of the overall export. However, Malaysia

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has now become the world’s second largest exporter of the LNG behind the nation of Qatar
with trade export aggregating over M$ 64bn in the year 2014 with over 8% of overall exports
(Frank and Robert 2014). The spectacular rise in the trade of LNG together with the rise in
the petroleum other reliant sectors in Malaysia such as plastics and chemicals has increased
the share of trade directly associated to carbons to approximately 30% of the overall export
from merely 13% in the year 2000. This ultimately makes the sector nearly as important as
the electronic and electrical segment.
Such compositional shift in the exports replicates numerous factors. One of the prime
reason for the change in the export of Malaysia is because of the rising international demand
for the raw supplies. As evident from the wealth of the Malaysia in the natural resources such
as in agriculture and mining, the country is nicely placed to gain from the rising international
demand for raw supplies especially in the rising economies of Asia (Laibson et al. 2014).
This has ultimately resulted in increasing share of commodity export of Malaysia in the
recent decade with additional main commodities such as palm oil, liquefied natural gas, crude
oil and natural rubber comprises for large amount of the rise in the segment of the supplies in
the gross export throughout that period.
Answer to question 2:
The declining ringgit or instead an increase in the US dollar against the rest of the
world’s currencies has bought forward mixed amount of fortune for the local economy.
Relating to such weakening of currencies organizations that generate their sales locally or
domestically with imported intermediate materials would be considered to be hit in a worse
manner from the weakening ringgit (Sunley 2017). The reason behind this is that they would
have to pay for their costs in the US Dollar and sell under the domestic currency. Even
though they are hedged once the safety hedge expires it will return back to the actuality once
again. On the other hand, if the ringgit continuous to remain weak or weakened further there

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could be an occasions where currency hedges would be required to be renewed once they are
expired and this would ultimately create an impact on the profitability of the organization.
On the other hand, other than the companies are local consumers that will continue to
lose out from the falling ringgit due to the decreasing purchasing power. Products that will be
imported will eventually cost a consumer more domestically and the overseas expenses
would also rise.
Answer to question 3:
For any economy, service sector is regarded as the bulwark of the economy since it
provides stability and contributes in a significant amount to the growth of the GDP. Targeting
service sector will help Malaysia in promoting stability of the income for the economy and
acts as the buffer throughout the phase of economic downturn (Rios et al. 2013). Importance
should be placed on increasing the utilization of the Malaysian construction service in the
international projects by placing emphasis on promotion of partnership between the local
small and medium Enterprise with the Multinational Companies. This would help in driving
exports of the ICT services and would ultimately help in promoting the brand visibility of
Malaysian education service internationally along with the increasing tourist arrivals.
The strategy of developing the service sector should be aimed at addressing the
shortfall registered by the Malaysian service sectors since the year 2010 as these strategies
are in accordance with the service sector blueprint that is launched last year (Mankiw 2014).
The service sectors overall comprises of the 53.9 percent of the Malaysian GDP and targeting
the development of the service sector would be the key driver of the Malaysian economy.
Other than the service sector, targeting the development of the automotive sector
brings forward an important choice of the global automotive organizations to execute the
activities of the headquarter, spares distribution, production of high value products and

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research and development. It is necessary to place emphasis on the increasingly important
activity as organizations needs an efficient and connected base in order to oversee this
functions. Malaysia has excellent facilities of physical and trade connectivity (LeRoy et al.
2014). Furthermore, it is has sufficient amount of supply chain professionals with well-
established financial infrastructure in order to make Malaysia a nation with attractive location
for the procurement and activities of supply chain. Malaysia has a strong industrial base in
the areas of electronics, information and communications and mechanical engineering will
ultimately support the growth of the automotive research and development in Malaysia.
Therefore, targeting the above stated two industries will be of greater importance as it
implies greater degree of future growth of the economy and will rely largely more on the
growth of the future performance of this sector and its productivity.
Answer to question 4:
The international production of oil and gas has increased by around 1.5 per cent each
year over the last decade and this is generally due to the remarkable increase in the demand
from the developing nations most notably form China (Marshall 2015). According to the
forecast of the International Energy Agency the international outlook for growth from the
year 2010 to 2020 for both the oil and gas demand will lead to additional shift in the
emerging economies during this period. In spite of the fall in the oil and gas prices the total
export of Malaysia yet experienced a positive comeback in the year June based on year on
year basis. Below stated are the two reason for such growth in the oil and gas prices;
a. One of the prime reason for such positive comeback in the Malaysian export is due to
the development in the upstream segment in Malaysia that has been driven largely by
the increasing prices of the oil and gas prices instead of increasing the productions
(Madsen 2013). The production in the Malaysian oil fields increased because of the

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usual growth of the old-style shelf basins. This represents that large number of the
economically striking oil fields that are most probable to have been noticed and
established with more new amount of findings are most probably to be technically
challenging rather than those that were developed previously.
b. The Malaysian export increased by 10% or in other words RM 6.6 billion to 73.1
billion in the month of June 2017 and this was primarily due to the increase in the
electrical and non-electrical products (Komlos 2016). An important assertion can be
bought forward in this context is due to the growth in the oil service of Asian market
that has experienced growth approximately by 20 per cent during the last decade. This
growth is mainly determined by the change in the more technically challenging fields
that has ultimately resulted in the boost in industry margin.
Therefore, it can be stated that the Malaysian oil outlook continues to be bright and it is
largely driven by the upbeat outlook relating to the offshore exploration activities in the
regions of south-east Asia with LNG increase in Australia.
Part B:
Answer to 1:
In normal terms, there are two major reasons of price rise. These major reasons of
price rise is generally known as the demand pull inflation and cost push inflation.
Demand pull inflation: Demand pull inflation takes place when the demand for certain kind
of products and service increases in relation to its supply (Weber 2017). When this takes
place, business are required to supply those goods or services that will regularly increase the
prices and consumers willing to purchase are required to pay more amount.

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Cost-push inflation: Cost push inflation originates when the price of producing certain kind
of goods and services increases which causes business that are impacted to hunt for rise in the
prices of the goods and services (Van 2014).
Effect on Businesses:
The demand pull and Cost Push inflation are more likely to create an effect on the
business in the following manner
a. Consumer Purchasing: Consumer purchasing is regarded as the most evident impact
on the businesses (Addison 2013). Rapidly growing prices will result in decline in the
demand of the consumer. This ultimately results in fall in revenue for the business and
lead to loss of revenue.
b. Inventory cost: Rapidly increasing cost will not only create an impact on the prices
of the products the consumers pay also create an impact on the cost of the businesses,
which they have to pay on the materials and inventory (Petkus 2014). When the
replacement inventory leads to higher cost then the inventory that is sold by the
business can result in shortage of inventory.
c. Change in prices: When there is a fluctuation in the prices of the service and product
businesses have to spend more amount of money on printing new menus or changing
the price tag to list the correct prices (Lutz 2014). these kinds of cost are known as the
menu cost and they create an impact on the brick and mortar of the business heavily.
Answer to question B:
The three groups in the economy that will be impacted by the inflation negatively are
listed below;
Equity holders and Investors:

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For individual that holds the shares or stocks of businesses advance during inflation.
When the prices is increasing commercial activities expand that ultimately increases the
incomes of the companies. As the profits, start increasing the dividends paid by the company
also start to increase at the rapid pace than the prices (Marshall 2013). But those investors
investing in debentures and bonds holds stable amount of interest rate and ultimately lose at
the time of inflation because the investors receive a fixed sum of interest at the time of falling
purchasing power.
Agriculturists: Agriculturist in the form of land holders lose at the time of the increasing
prices since they get fixed amount of rents. The agriculturist suffers more from the rising
price of the farm products than the production cost. For the prices of the inputs and there is
no rise in the land revenue in the same extent as the rise in the prices of the farm products
(Asarta and Butters 2016). Simultaneously, the landless agriculturist employees are the worst
hit by the increasing costs since the prices of the consumer goods keeps on rising rapidly.
Fixed Income Group: The receiver of the transfer payments in the form of retirement
pension, redundancy insurance, social security etc. and receiver of the interest and rent
survive on the static incomes (Baumol et al. 2015). Pension earners generally get fixed
amount of pensions. Similarly, the rentier class of people comprises of the interest and rent
receivers and acquire fixed amount of payments. This ideally applies to the circumstances of
the holders of the fixed interest bearing securities and debentures. Therefore, all these persons
lose since they receive fixed amount of costs whereas the value of the money keeps on falling
because of the rising prices.

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Part C:
Answer to A:
Housing developers can look forward towards more than improved sentiments with
better amount of sales. If the government undertakes the policy of reducing the interest rate
then it will help the housing developer since they have witnessed rising amount of debt over
the past few years (Olsen 2017). With the government initiative of undertaking reduced
amount of interest real estate developers would be able to save large amount of money.
Lowering of interest rate by the government could be viewed as the relief for the housing
estate companies because they have been experiencing slower amount of sales. With the
reduced interest rates, housing developers would be able to increase their sales in the low rate
regime and can get the banks to soften their stance with accommodative interest rates
(Mukherjee 2014).
Answer to question B:
The expansionary fiscal policy of the government attempts to increase the aggregate
demand. It generally comprises of the higher government spending and lower amount of tax
(Kovzik 2016). Alterations in the government fiscal policy create an impact on the aggregate
demand both in the form of directly or indirectly through a series of complex multiplier and
feedback mechanism.
Alterations in the GNP might in turn create an impact on the disposable personal
income, income distributions, employment, level of prices and so on. Therefore, housing
markets are sensitive in changing degrees of the each of these economic parameters (Cowen
2015). Conventional wisdom hypothesizes that for a given federal expenditure patterns and
increase in the tax rate would ultimately result in decrease in the GNP.

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On the other hand, a fall in the GNP might indirectly create an impact on the housing
developers by ultimately inducing variations in the intermediary economic variables such as
disposable income, employment and prices. These economic factors might additionally create
an impact on the demographic variables that tends to influence the housing starts. For a given
amount of tax rates, an increase in the government spending will usually result in increase in
GNP. As stated in the earlier instances a change in the GNP might activate a change for the
housing developers.

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Reference List:
Addison, John T., and John Burton. "The demise of “demand-pull” and “costpush” in
inflation theory." PSL Quarterly Review 33, no. 133 (2013).
Asarta, C. J., and R. B. Butters. "Principles of Economics." (2016).
Baumol, William J., and Alan S. Blinder. Microeconomics: Principles and policy. Cengage
Learning, 2015.
Bernanke, Ben, Kate Antonovics, and Robert Frank. Principles of macroeconomics.
McGraw-Hill Higher Education, 2015.
Cowen, Tyler, and Alex Tabarrok. Modern principles of economics. Palgrave Macmillan,
2015.
Frank, Robert. Microeconomics and behavior. McGraw-Hill Higher Education, 2014.
Komlos, John. Principles of economics for a post-meltdown world. Springer, 2016.
Kovzik, Alexander, and Marianne Johnson. "Comparative economics systems in the
undergraduate curriculum: An update." The Journal of Economic Education 47, no. 2 (2016):
168-173.
Laibson, David, and John A. List. "Principles of (behavioral) economics." The American
Economic Review 105, no. 5 (2015): 385.
LeRoy, Stephen F., and Jan Werner. Principles of financial economics. Cambridge University
Press, 2014.
Lutz, Friedrich A. "Cost-and demand-induced inflation." PSL Quarterly Review 11, no. 44
(2014).