Economy Of Malaysia And Its Assessment Answer

Answer:

Introduction

The main aim of the assignment is to analyze the economy of Malaysia and its inflation condition.

Inflation can be defined as general rise in the prices of goods and services over a particular span of time for fixed baskets of goods and services. Increase in inflation raises the prices while it decreases the purchasing power of the consumer.  It is the percentage change in the value of goods and services in the economy (Galí 2015).

Consumer price index is an approach to measure inflation in an economy. Consumer price index measures the changes in the prices of the fixed basket of consumer goods and services purchased by households during any particular time interval (Index and Indicators 2014). The consumer price index in Malaysia includes:

  • Food and Non Alcoholic beverages
  • Alcoholic beverages and tobacco
  • Clothing and footwear
  • Housing water, electricity, gas and other fuels
  • Furnishings and household equipment
  • Health, transport and communication
  • Education and recreation services and culture
  • Restaurants and hotels
  • Miscellaneous goods and services
  • Non food items such as durable goods, semi durable goods and non durable goods and services (Level 2015).
  • The most important categories in CPI in Malaysia are Food and alcoholic beverages that account for 30% of contribution. The consumer prices in Malaysia fell in 2016 due to gradual fall in the cost of transportation, and other public utilities.  The rate of inflation rose in the year 2014 and fell in 2015 (Hong and Razak 2015). 

    Inflation in Malaysia

    Table: 20 years Inflation Rate from 1996 – 2015 in Malaysia


    Year

    Inflation rate (%)

    1996

    3.5

    1997

    2.7

    1998

    5.3

    1999

    2.7

    2000

    1.5

    2001

    1.4

    2002

    1.8

    2003

    1.0

    2004

    1.5

    2005

    3.0

    2006

    3.6

    2007

    2.0

    2008

    5.4

    2009

    0.6

    2010

    1.7

    2011

    3.2

    2012

    1.7

    2013

    2.1

    2014

    3.1

    2015

    2.1

    (Source: Data.worldbank.org. 2016).

    Figure: inflation rate in Malaysia

    The rate of inflation is Malaysia is fluctuating in nature. The inflation rate was highest in the year 2008 while it was lowest in 2009. The rise in the inflation rate in Malaysia is due to an increase in the prices of crude oil. The rise in the prices of natural resources leads to an increase in the price of natural gases and other items that leads to rise in inflation rate. Another reason for the inflation rate in Malaysia is due to the rise in the wages and salary of the government servant. Thirty percent of goods in Malaysia are price controlled. The inflation rate in Malaysia in recent year has been falling due to fall in the prices of transportation and other public utilities. The average rate of inflation in Malaysia is 3.14 percent in the year 2014 as compared to the previous year. This shows that the economy of Malaysia is recovering. The annual growth rate in GDP in Malaysia is 4.7 percent in 2013 and it is the most competitive country in the world. One of the reasons for the prices of goods and service in 1998 was the currency crisis that led the prices of goods to rise. The second was the global financial crisis in 2008 that also led the prices to rise (Tradingeconomics.com. 2016).

    Policies

    Government uses various policies to control inflation in Malaysia. The bank of Negara in Malaysia acts as central banks helps the other commercial banks and the government by giving financial advice to control inflation.  The policies implement by Malaysian government are:

    • Monetary policies- this policy is used to control the money supply in the economy. The instruments of monetary policies are open market operations, statutory reserve requirement, discount rate and moral suasion. Open market operations is the buying and selling of government bonds and securities. To control the inflation the central bank in Malaysia forces the commercial banks to buy the securities that will reduce the money supply and capability of giving loan which in turn will control the inflation. Next is the statutory reserve requirement where the central bank controls the inflation by increasing the reserve ratio that reduces the capability of giving credits to customers (Olivera 2014). The other measures are discount rate and moral suasion. The inflation rate and the discount rate are inversely related. If the government wants to control inflation the discount rate will be increased to reduce the flow of money. Moral suasion is the involvement of central bank in bank policies and activities. The bank simply gives order as to how to control inflation to financial institutions.
    • Fiscal policies- fiscal policies deal with government expenditure and taxes. To control the inflation government will increases the amount of taxes while the government expenditure will fall in order to control the money supply in the economy. This is known as surplus budget policies. The income of the consumers will fall and so is their purchasing power which in turn will help the economy control its inflation rate (Weale et al. 2015).
    • Direct or physical control- the Malaysian government has also implemented the direct method to control the inflation. This method is used to stop the speculative activities. Proper actions are taken against those retailers and trader involved in hoarding goods and services that leads to unnecessary rise in the prices. New price of cooking oil is introduced by the government in order to avoid the prices to rise (Sharma 2016).

    The policies implied by the government in Malaysia have helped the economy control its rate of inflation. The consumer price index in January 2016, increased by 0.6 percent due to the increase in the prices of food and non alcoholic beverages. The rise in CPI leads the inflation rate to rise in January 2016.  Core inflation differs from overall CPI and is calculated excluding the prices of the goods and services that are subject to fluctuation. It is used for directing the monetary policies in the economy.  There are various policies that have been implemented by the government of Malaysia. It is one of the most competitive economies in the world with the average rate of growth accounted for 4.7 percent annually (Shaari et al. 2012). 

    Conclusion

    Hence, inflation rate is an important measure or economic indicator that helps in determining the economic growth. Inflation rate ion the changes in the prices of goods and services in the economy. It is essential for the government to use policies that controls the inflation. There are various reasons that can cause the prices of the goods and services to rise in the economy. The main reason for the rise in prices of goods and services in Malaysia is the rise in the prices of crude oils. The second reason is the rise in the wages and salaries of the government employees. Government uses various policies such as monetary policies, fiscal policies and direct or physical methods to control the inflation in the economy. The global financial crisis and the currency crisis in the past had led the prices and the inflation rate to rise. The bank of Negara is the central bank in Malaysia that plays a major role in controlling the rate of inflation in the economy. Consumer price index is used as a tool to measure the changes in the prices of the fixed basket of goods and services. The basket of consumer goods is compromised of many products and items such as durable, non durable goods, services, food, alcoholic and non alcoholic beverages and electricity and other basic necessities.     

    References

    Data.worldbank.org. (2016). Data | The World Bank. 

    Galí, J., 2015. Monetary policy, inflation, and the business cycle: an introduction to the new Keynesian framework and its applications. Princeton University Press.

    Hong, S.C. and Razak, S.H.A., 2015. The impact of nominal GDP and inflation on the financial performance of Islamic banks in Malaysia.

    Index, C.P. and Indicators, L.E., 2014. Consumer Price Index.

    Level, P.C.O.Y.A., 2015. Consumer Price Index.

    Olivera, J.H., 2014. Money, prices and fiscal lags: a note on the dynamics of inflation. PSL Quarterly Review, 20(82).

    Shaari, M.S., Hussain, N.E. and Abdullah, H., 2012. The effects of oil price shocks and exchange rate volatility on inflation: evidence from Malaysia.International Business Research, 5(9), p.106.

    Sharma, S.S., 2016. Can consumer price index predict gold price returns?.Economic Modelling, 55, pp.269-278.

    Tradingeconomics.com. (2016). Malaysia Inflation Rate Forecast 2016-2020.

    Weale, M., Blake, A., Christodoulakis, N., Meade, J.E. and Vines, D., 2015.Macroeconomic Policy: inflation, wealth and the exchange rate (Vol. 8). Routledge.

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