Analysis Of Production Output, Labor Market, And Price Level In Malaysian Economy

Production Output Performance Analysis

Malaysia is a constitutional federal monarchy situated in the South East Asia. It is the third biggest economy in that region, preceded by Indonesia and Thailand. It ranks 36th in the list of biggest economies of the world. The Malaysian economy is mostly industry based. Hence, the export of tech products is very high, worth of USD 63.3 billion in 2014. The country exports palm oil products globally, second largest by volume and value (Andaya & Andaya, 2016). Malaysia is highly dependent on oil exports, hence, the currency fluctuations are very frequent.

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GDP or Gross Domestic Product refers to the final value of goods and services produced within the geographic boundary of a nation, over a stipulated time period, i.e. a year. GDP is the best measure of the economic growth of a nation.

GDP comprises of the following elements, Consumption (C), Investment (I), government expenditures (G) and the difference between exports (X) and imports (M), i.e. net exports (NX). There are two types of GDP: Nominal and Real. Nominal GDP represents the GDP at current market prices. It includes the changes in the prices of the nation (Mankiw 2014).

Real GDP is the evaluation of the value of production in the country relative to the changes in the price level of the country. Changes in the price level can be inflation or deflation. Real GDP comprises of the production happened inside the country and not outside the country. Thus, the effects of terms of trade and exchange rate are eliminated. Real GDP is always less than nominal GDP (Evans & Honkapohja, 2012).

GDP of Malaysia has shown an increasing trend in the last 10 years from 2007 to 2016. Being one of the biggest economies in the South East Asia, Malaysia has seen growth in GDP through the development of industries.

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(Source: World Bank, 2017)

According to the World Bank data, the GDP of Malaysia reached a peak in 2014 at US $338.1 billion. However, it declined a little in the consecutive two years, i.e. 2015 and 2016.

Real GDP growth rate:

It represents the proportion of growth in the real GDP of a nation in every quarter. This estimates the pace that the country is growing (Burda & Wyplosz, 2013).

Per capita GDP

Per capita GDP is obtained by dividing the total GDP by the total population of the country. It is useful in measuring the standard of living of a nation (Mankiw 2014).

Trend of the Performance

In the past 10 years, there has been significant growth in the Malaysian economy. The industrial sector is the major contribution in the GDP. Malaysia’s economy grew by more than 6%, which is only behind Philippines. The country has focused to develop an endogenous capability in innovation. At the same time, the country is endowed with many natural resources, which has helped in the growth of agriculture, minerals and forestry. The export sector has seen massive growth in the past 10 years. Malaysia exports huge amount of petroleum, natural rubber and palm oil, along with timber products, pepper, cocoa, pineapple and tobacco. This brought a significant amount of foreign currency to the country. However, following a volatile oil price and a fall in the world oil price the GDP slightly declined in 2015 and 2016 (Andaya & Andaya, 2016).

The Malaysian government has taken proactive measures to promote economic growth. The country has faced challenges, such as, lower export prices, and turbulent international exchange markets, along with fall in foreign investment and falling currency over the past 10 years. However, the manufacturing industry has expanded, leading to a rise in the GDP. The country is Asia’s largest exporter of oil (Tang & Tan, 2013). During the 10th Malaysia Plan, it has been found that the services sector contributes maximum to the GDP, 53.8% in 2015. The government plans to achieve 58% by 2020. The service export was RM 135.66 billion in 2015, 1.2% less than in 2014, and import of services amounted to RM 156.14 billion, increased by 5.6% from 2014 (Lee, 2017). The government has formulated and implemented policies to improve the services sector further and increase the revenue. The plans focused on priority sectors such as, construction, IT services, etc.

Malaysia has been experiencing a constant and moderate unemployment rate ranging between 2.9% to 3.7% in the past 10 years. The average unemployment rate is 3.2%. However, the youth unemployment rate has been increasing over the years according to a report of Bank Negara of Malaysia (Thestar.com.my, 2017).

 

(Source: World Bank, 2017)

Unemployment represents the situation of an economy, when there is lack of jobs for a person, who is able or willing to work. It is represented by rate of unemployment, which is derived from the ratio of total unemployed population to the total work force of a nation. The work force comprises of the people, who are able and willing to work and at present working (Heijdra, 2017).

Government Measures

The following are the types of unemployment:

  1. Cyclical unemployment: this type of unemployment arises when the economy contracts, leading to a fall in the demand for goods and services. Thus, level of production reduces and demand for labor also declines. It is also called the Keynesian unemployment (Burda & Wyplosz, 2013).
  2. Structural unemployment: When there is a change in the structure of the economy, such as, technological innovation, there arises market inefficiencies and shortage of jobs, and this results in structural unemployment.
  3. Frictional unemployment: when the workers shift from one job to the other, there is always some mismatch in the qualities of workers and the job requirements. This transition results in unemployment, known as frictional unemployment.
  4. Seasonal unemployment: this represents the unemployment, which emerges in particular seasons or time of the year. It is mostly seen in some specific industries, such as, agriculture, tourism, retail, farming and construction. In these industries, many workers are hired during the peak time and in the off time, they lose their jobs. This is called seasonal unemployment (Evans & Honkapohja, 2012).

It has been found, that in Malaysia, the communication skills of the people are very poor. This includes both the verbal and written communication skills. Furthermore, the educational courses are not relevant with the industry. Apart from that, people’s expectation from the job is very high. All these lead to a high level of structural unemployment in the nation. There is a serious problem in the educational structure of Malaysia, which results in unemployment, especially youth unemployment. Frictional unemployment is also present in the country (Hanapi & Nordin, 2014).

The government has taken some measures in the past few years to control the unemployment situation in the country. They have introduced industry relevant curriculums along with technical certifications. This would enable the people to fit into the industry requirements. The government has also made the personality development programs and soft skill development curriculums mandatory in the schools, colleges and universities, so that the communication skills of the people improve (Fong, Sidhu & Fook, 2014). It has also introduced policies to enhance the labor market flexibilities.

 

(Source: World Bank, 2017)

From the data of World Bank, it can be seen that the inflation rate in Malaysia has been fluctuating over the last 10 years. The most striking feature in this trend is that, inflation rate reached its peak on 2008 at 5.4%, while it dropped to its lowest to 0.6% in the immediate next year, i.e. 2009. 2011 onwards, the rate of inflation has been up and down, with an average of 2.4%, however, the general trend is going down.

Inflation refers to the continuous rise in the general level of price in the nation. Inflation is measured by the rate of inflation, which is the proportion of the price change over time. If inflation rate is very high, the currency of that nation devaluates. The tool for measuring inflation is the Consumer Price Index (CPI) (Mankiw, 2014).

There are two types of inflation: cost push and demand pull. Cost push inflation emerges when there is a rise in the prices of the inputs of production. In that case, the producers raise the prices of the products for profit maximization. This leads to a rise in the general price level of the country. On the other hand, when excess demand emerges in the economy, it raises the prices of the products, which are high in demand. This also results in the rise in the price level of the economy. This is known as demand pull inflation (Heijdra, 2017).

Cost push Inflation

Labor Market Analysis

Rise in energy price:

Since 2008, Malaysia has been experiencing rising inflation due to a hike in the oil prices, which pushed up all other prices in the nation. The oil price increased due to a rise in the crude oil price globally. As Malaysia produces and exports oil in a large volume, hence, the global rise in the oil price has affected the Malaysian economy too (ChinaAbout.net, 2017).

In May 2012, Malaysian Prime Minister increased the minimum wage to RM 900 in the peninsula and RM 800 in Sarawak and Sabah region, with a six months grace period, double for the micro-organizations. This has led to rising unemployment, pressure of inflation, and black markets for labor. The increased wages have pushed the employers to pass the burden on the customers by raising the prices of production. This has resulted in increased inflation in the country (Tsen Wong, 2013).

Demand pull Inflation

With the current trend of globalization and the development of emerging economies, the trade volume has increased globally, leading to opening of international markets. Thus, the aggregate demand has been rising in the economy, and generates demand pull inflation (Gandolfo, 2013).

The government of Malaysia has increased the level of purchases in the recent years and that has resulted in increase in the money supply in the economy. Thus, the aggregate demand for goods and services has increased, leading to demand pull inflation (Park & Yoo, 2014).

The Malaysian government has taken strict monetary policies to control inflation and support growth. Too much inflation depreciates the currency and exchange rate becomes unfavorable. A sudden fall in the crude oil prices in 2015 has led to volatility in the economy and the government was forced to limit their spending and lower the growth forecast. It was reflected in the GDP of those years. Thus, Bank Negara has focused on expansionary monetary policies to control inflation and promote growth. It kept its key rate unchanged so that the currency did not become weaker compared to its counterparts. The Malaysian economy has followed an accommodating monetary policy over the last 10 years to support growth, control inflation and stabilize the economy (The Business Times, 2015).

Conclusion

It can be concluded that the economy of Malaysia has experienced growth in the past 10 years. The production level has increased, leading to a steady rise in the GDP, unemployment and inflation remained moderately constant. Along with the oil production and export, the industrial sector has developed too. However, the development of education sector has surpassed the expansion in the job sector and thus, the youth unemployment has been a serious concern for the Malaysian government.

References

Andaya, B. W., & Andaya, L. Y. (2016). A history of Malaysia. Palgrave Macmillan.

Burda, M., & Wyplosz, C. (2013). Macroeconomics: a European text. Oxford university press.

ChinaAbout.net. (2017). Causes of inflation and main causes of inflation in Malaysia. ChinaAbout.net. Retrieved 4 August 2017, from https://www.chinaabout.net/causes-of-inflation-and-main-causes-of-inflation-in-malaysia/

Evans, G. W., & Honkapohja, S. (2012). Learning and expectations in macroeconomics. Princeton University Press.

Fong, L. L., Sidhu, G. K., & Fook, C. Y. (2014). Exploring 21st century skills among postgraduates in Malaysia. Procedia-Social and Behavioral Sciences, 123, 130-138.

Gandolfo, G. (2013). International Economics II: International Monetary Theory and Open-Economy Macroeconomics. Springer Science & Business Media.

Hanapi, Z., & Nordin, M. S. (2014). Unemployment among Malaysia graduates: Graduates’ attributes, lecturers’ competency and quality of education. Procedia-Social and Behavioral Sciences, 112, 1056-1063.

Heijdra, B. J. (2017). Foundations of Modern Macroeconomics: Exercise and Solutions Manual. Oxford university press.

Lee, J. (2017). Boosting the Services Sector. Pressreader.com. Retrieved 4 August 2017, from https://www.pressreader.com/malaysia/the-star-malaysia-starbiz/20170213/281685434594774

Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.

Park, S. Y., & Yoo, S. H. (2014). The dynamics of oil consumption and economic growth in Malaysia. Energy Policy, 66, 218-223.

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

Tang, C. F., & Tan, E. C. (2013). Exploring the nexus of electricity consumption, economic growth, energy prices and technology innovation in Malaysia. Applied Energy, 104, 297-305.

The Business Times. (2015). Malaysia monetary policy to focus on growth after inflation ebbs. The Business Times. Retrieved 4 August 2017, from https://www.businesstimes.com.sg/government-economy/malaysia-monetary-policy-to-focus-on-growth-after-inflation-ebbs

Thestar.com.my. (2017). Young and jobless. Thestar.com.my. Retrieved 4 August 2017, from https://www.thestar.com.my/business/business-news/2017/03/27/young-and-jobless/

Tsen Wong, H. (2013). Real exchange rate misalignment and economic growth in Malaysia. Journal of Economic Studies, 40(3), 298-313.

World Bank. (2017). Malaysia | Data. Data.worldbank.org. Retrieved 4 August 2017, from https://data.worldbank.org/country/malaysia