Macroeconomic Performance of Malaysia: Output, Labor Market and Price Level

This paper provides a comprehensive analysis of the macroeconomic performance of Malaysia over a period of ten years. The economic performance is judged on three major scale of output performance, labor market performance and price level stability. The government measures to achieve production output and overcome unemployment have also been discussed.

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Table of Contents
Introduction......................................................................................................................................2
Production output performance.......................................................................................................2
Real GDP.....................................................................................................................................2
Real GDP growth rate..................................................................................................................4
Real GDP per capita....................................................................................................................4
Government measures to achieve production output...................................................................5
Labor market performance..............................................................................................................6
Unemployment and its type.........................................................................................................6
Type of unemployment in Malaysia............................................................................................6
Government measures to overcome unemployment....................................................................8
Price level of Malaysia....................................................................................................................8
Inflation and its causes.................................................................................................................8
Inflation trend and cause of inflation in Malaysia.......................................................................9
Government policies to stabilize price level..............................................................................10
Conclusion.....................................................................................................................................11
Reference list.................................................................................................................................12

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Introduction
In Southeast Asia, Malaysian economy is the fourth largest economy. In the world
economy, Malaysia ranks 38. Labor productivity in Malaysia is considerably higher as
compared to the neighboring nations. High productivity of the economy is contributed from
adaption of advanced technology and presence of high technology intensive knowledge based
industries. The global competitive report of 2017 suggests Malaysia to be the 23rd most
competitive nation in the world for the period 2017-18. Agriculture in Malaysia now has
become a minor sector contributing only 7.5% of the GDP. Agriculture now employs only 11.1%
of the labor force as against 66.25 in 1960 (Jomo, 2016). The agriculture production has also
now shifted to industrial crops such as palm oil, rubber from food crops such as paddy and
coconut. Industrial sector in Malaysia contributes 36.8% of GDP. The sector employs 36% of
total labor force. The three main industries of Malaysia are Electronic industry, Construction
industry and automotive industry. Finance and Banking is the main service sector of Malaysia.
Other services of Malaysia include tourism, medical tourism, oil, gas, and others. Malaysia is
one of the major trading hub in Southeast Asia. Malaysia is the largest producer of rubber, tin
and palm oil. Some of the world’s largest companies operating in Malaysia are Maybank, Tenega
Nasional, CIMB Group, Public Bank Berhad, Sime Darby, Axiata Group, Maxis and IOI Group.
Production output performance
Real GDP
Gross Domestic Product is a macroeconomic measure of aggregate output. It expresses
value of domestically produced goods and services in monetary terms. GDP is a quantitative and
obtained from summing up value of all goods and services. It is quantitative measure where

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values of goods and services are obtained from multiplying quantity of produced goods with
their respective market price. Now, in computing GDP two types of market price can be used.
One is current year market price and other is market price of a constant base year. GDP obtained
using prices of current year gives nominal GDP while GDP obtained in constant base year prices
is called Real GDP (Agénor & Montiel, 2015). Real GDP provides a more accurate measure of
aggregate output as it is free from price effect. If not adjusted for prices, then GDP might
understate or overstate values of output price level changes overtime.
Figure 1: Real GDP of Malaysia
(Source: tradingeconomics.com, 2018)
The figure above shows trend in real GDP of Malaysia in the last ten years. This indicates an
overall rising trend in real GDP. In the first quarter of 2018, GDP at constant prices decreased to
MYR 295288 million from MYR 308078 (in million) in the last quarter of 2017. The real GDP
averaged MYR 211429.11 million between 2005 and 2018. The highest GDP of MYR 308078
million in 2017. The recorded lowest GDP of MYR 130630 (in million) was recorded in 2005
(tradingeconomics.com, 2018)

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Real GDP growth rate
Growth rate of real GDP is the percentage change in real GDP between two consecutive
years. Growth rate in real GDP indicates growth rate of the entire economy (Mankiw, 2014).
Figure 2: Trend in real GDP growth rate
(Source: tradingeconomics.com, 2018)
The economy of Malaysia experienced an economic slowdown in response to global financial
crisis of 2008. In the last quarter of 2008, the economy slowed down by 0.1%. In the first quarter
of 2009 the economy contracted by -6.2% (Jomo, 2016). Recession in the Malaysian economic
was continued for the first two quarters of 2009. After that economic growth though recovered
and reached above 2 percent, growth again fell in 2010. The worst phase of economic growth
passed after that and economy grew on an average rate of around 2 percent.
Real GDP per capita
Per capita GDP is a measure of average output per person. It is obtained by dividing total
GDP by total population. This is a measure of average income in the nation and hence, indicates

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standard of living of the nation (Blanchard, 2018). In order to compare living standard of two
nations per capita real GDP is used as a standard measure of comparison.
Figure 3: Per capita real GDP
(Source: tradingeconomics.com, 2018)
Per capita real GDP in Malaysia has increased overtime. With a decline in economic
growth in 2009, per capita GDP declined to 8635.1 USD from 9020.4 USD in 2008. From 2009
onwards per capita GDP continues to increase. The last recorded per capita GDP in Malaysia is
11028.2 USD which is highest since 1960 (tradingeconomics.com, 2018).
Government measures to achieve production output
Economic growth in Malaysia has achieved following a series of economic and structural
reforms initiated by government. There is a centralized economic development planning unit in
Malaysia. The development unit designs plan for economic development for a span of five years.
The planning unit targets to achieve an equal distribution of income and opportunities.
Government aims to attain a sustainable economic growth sharing benefits equally among all the
groups. Objectives of eleventh Malaysian plan include acceleration of human capital

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development to achieve state of an advanced nation, promotion of green growth to attain
sustainability and resilience, infrastructural development for economic expansion and attaining a
higher prosperity through re-engineering economic growth (Koen et al., 2017). Under the
ongoing development planning policies are introduced to increase potential productivity, lifting
bottom 40% of the household toward the status of middle income class, arrangement of industry
based technological and vocational training and education center, transformation of innovation to
wealth and investment in competitive economic areas and cities.
Labor market performance
Unemployment and its type
Unemployment defines a situation where willing workers suffer from lack of jobs or
gainful employment. Rate of unemployment in ab economy is an indicator of labor market status.
Different types of unemployment include structural, frictional, seasonal, cyclical and
technological. Structural unemployment is caused by mismatch between available jobs and skills
of laborers. Cyclical or demand deficient unemployment is a result of business cycle fluctuation
causing fluctuation in aggregate demand. Short term unemployment due to moving between two
jobs is called is called frictional unemployment (Johnson, 2017). Adaption of new technology in
an industry causes some unskilled laborers to lose their jobs resulting in technological
unemployment. People engage in jobs highly dependent on seasonal condition experience
seasonal unemployment.
Type of unemployment in Malaysia
Frictional, structural and cyclical unemployment are the three dominating form of
unemployment in Malaysia. Several factors are responsible for frictional unemployment. These

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include lack of knowledge about employment market, unexpected disaster and strikes due to
disputes between workers and manufacturers. In Malaysia structural unemployment has occurred
in 1980 following a decline in main economic sectors. Structural unemployment caused by
technological change, changing dynamics of consumer preference, geographical immobility and
other structural change (Mekhilef et al., 2014). Business cycle fluctuation causes cyclical
unemployment in Malaysia. The slowdown of US economy resulted in s decline in export of
manufacturing from Malaysia aggravating unemployment problem in the economy.
Figure 4: Unemployment trend in Malaysia
(Source: tradingeconomics.com, 2018)
Unemployment rate in Malaysia increased rapidly during 2009 with unemployment rate reaching
above 4 percent. From 2010 onwards, in response to policies to promote economic growth and
employment unemployment gradually reduces. Unemployment rate reached to 2.7 percent in
2015. However, after that unemployment rate continued to increase. In March 2018,
unemployment rate has slightly reduced to 3.3 percent from 3.4 percent in the previous year. The

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average unemployment rate in Malaysia is 3.29 percent over the period from 1998 to 2018
(tradingeconomics.com, 2018).
Government measures to overcome unemployment
The government of Malaysia is well aware of unemployment problem in the economy
and has taken steps to reduce unemployment by adapting a suitable strategy of job creation.
Government targets to create jobs mostly in knowledge intensive and technological sector. New
job opportunities have been opened up in fields like bio-process engineering, bio-informatics,
flexible and integrated computer manufacturing, theoretical physics, software and networking,
artificial intelligence and others. Development and promotion of new job creation has been
undertaken in different sub sectors of agriculture, manufacturing and service (Gomez et al.,
2018). Malaysia progressing towards status of a developed nation has adapted production
technology based on energy saving technology stressing utilization of new and alternative
sources of energy like hydrogen, bio-fuel, solar and wind energy. Therefore, new jobs are created
in areas like environment management, pollution minimization, R&D, waste management and
environment engineering. Private and public companies are encouraged to expand business
abroad in order to secure opportunities for business and investment. Opening to trade provides
access to new market creating demand for domestically produced final and intermediate goods.
The multinational companies help to create new job opportunities in long run. An important part
of job creation strategy is development of small and medium sized enterprises. In Malaysia there
is approximately 519,000 small and medium sized enterprises hiring nearly 2.3 million workers
(oecd.org, 2018).
Price level of Malaysia

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Inflation and its causes
Inflation is defined as situation where general price level rises continuously. The causes
of inflation are categorized in two main factors – demand pull inflation and cost pull inflation.
When demand increases at a very rapid rate then due to limited supply the economy experience a
supply shortage. This shortage of supply creates an upward pressure on price resulting in
inflation. This type of inflation is called demand pull inflation (Bernanke, Antonovics & Frank,
2015). Inflation can also be caused due to rising cost of production. A rise in input cost increases
cost of production. To maintain profitability producers then increases price of goods and services
result in an overall increase in price level.
Inflation trend and cause of inflation in Malaysia
Figure 5: Trend inflation rate in Malaysia
(Source: tradingeconomics.com, 2018)
The recent trend in consumer price inflation shows inflation has increased to 1.4 percent
in April 2018 from a rate of 1.3 percent in the previous month. This is below market census rate

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of 1.6 percent. Prices have increased for transport, hotels, restaurant, recreation and culture. In
contrast, cost of food and non-alcoholic beverages have declined. Price level have remained
almost stable for housing mad utilities. The core inflation rate has declined to 1.5 percent from a
rate of 1.7 percent in the previous month (tradingeconomics.com, 2018). The average inflation
rate in Malaysia is 3.62 percent. the economy accounted the lowest level of inflation in 2009
with inflation fell to -2.40 percent.
Government policies to stabilize price level
The government of Malaysia adapts several strategies to fight against inflation. Bank
Negara Malaysia is the central bank of Malaysia and has the responsibility to maintain stability
in price level. Both monetary and fiscal policies are used by Malaysia to combat inflation. Under
monetary policy, three measures are used by central bank in order to control inflation by
adjusting available money supply. Excessive supply of money is one major cause of inflation.
One instrument to control money supply is open market operation. Central bank adds or reduces
money supply through buying and selling securities. In times of inflation BNM forces
commercial banks and other financial institution to buy government securities. This reduces
availability of money to central bank to give loans (Jha et al., 2014). Next tool used is the
statutory reserve ratio. The central bank of Malaysia control inflation through increasing the
reserve ratio. The increased reserve ratio reduces capability of commercial banks to lend to
investors and consumer group in the economy and hence reduces inflationary pressure. The most
useful tool used to control inflation is the discount rate. It is the rate at which central bank lend
funds to commercial banks. During inflation BNB increases the discount rate. Moral suasion is
often used as a useful strategy to combat inflation. Fiscal policy is also employed by Malaysian

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government to reduce inflation (mida.gov.my, 2018). Government adapts direct or physical
control to fight inflation. One example of direct control is anti-hoarding campaign.
Conclusion
The paper summarizes macroeconomic performance of Malaysia over a period of ten
years. The economic performance is judged on three major scale of output performance, labor
market performance and movement of price level. To measure output performance three selected
indicators are used – real GDP, real GDP growth rate and per capita real GDP. Output
performance of Malaysia is quite satisfactory as shown from a rising trend in real GDP and per
capita real GDP. The economic growth rate remains more or less stable in recent years. Stability
has also been achieved in price level. Unemployment in recent years has increased slightly.
Government plays an important role in achieving economic progress of Malaysia. Policies
undertaken to promote economic growth, employment and stability in price level helps to
become 4th largest Southeast Asian economy.

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Reference list
MIDA | Malaysian Investment Development Authority :. (2018). Retrieved from
http://www.mida.gov.my/home/2360/news/pm-introduces-proactive-measures-to-
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edition. Economics Books.
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Johnson, H. G. (2017). Macroeconomics and monetary theory. Routledge.
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from https://tradingeconomics.com/malaysia/gdp-growth-annual

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Malaysia GDP Constant Prices | 2005-2018 | Data | Chart | Calendar. (2018). Retrieved fro
https://tradingeconomics.com/malaysia/gdp-constant-prices
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