ECO501 Assignment1 (3,000 words)

1. Introduction
Malaysia is a South-East Asian country. Kuala Lumpur is the capital city. Malaysias
total population stands at over 30.5 million in 2016 and is projected to increased by about
460,000 people and reach 31,000,000 in the beginning of 2017. Additional, it is projected
that Malaysia will become an ageing population in 2021 when the population aged 65 years
and over reach 7.1 per cent.
The type of economic system in Malaysia is mixed economy. The characteristics of it
are an opened developing economy, middle income economy, and export dependent
economy.
The structure of Malaysia economy is based on export, and household consumption.
Malaysias GDP currently equals over $300 billion. The composition of GDP breaks down
roughly as 51% Consumption, 26% Investment, 14% Government, and 9% Net Export.
Data released by Bank Negara on the monetary and financial developments for
January showed that M3, the most inclusive definition of money supply, was lower
compared to the same month last year. The growth in M3 for January was even weaker than
for December, when it grew by 2.7% and this has been weakening since last October. M1
has also been on a declining trend since last October.
Taken together, both gauges can imply to the increase of GDP, increase of GDP Per
Capital, decrease of Inflation Rate, increase of Unemployment Rate, and Lower Quality of
Life. However, in the long run, if the bank Negara responded by using Expansionary
Monetary policy such as cutting the base rate, then it would make a difference.
Based on my analysis, Malaysia economic now is going to decline. The industry will
be boom is the industry that related to consumer goods, household product,
pharmaceutical, education, and agriculture product. While the industry that will be suffered
is the industry that related to brokerage and investment bank, high-technology product,
construction, insurance, machinery, auto parts, trucking, entertainment, traveling and
tobacco.

2. Literature Review
The money supply is the total amount of money in the economy. It can include cash,
coins and balances held in checking and saving accounts. Because of the various types of
money in the money supply, the money supply is generally classified into different label as
M0, M1, M2 M3 (Friedman, 1956).
Money supply data is collected, recorded, and published periodically, recorded and
published periodically, typically by the countrys government or central bank (Selgin, 1988).
Central banks economists analyze these money supply and develop policies revolving
around it through controlling interest rates and increasing or decreasing the amount of
money flowing in the economy. This is because of the money supplys possible impacts on
price level, inflation and the business activity (Suranovic, 2010).
There were many research evidences indicate that there is a relationship between
money supply and economic growth. Steve (1997) and Domigo (2001), explain that there
may not be possibility of economic growth without an appropriate level of money supply,
credit and appropriate financial conditions in general money supply exerts considerable
influence on economic activity in both developed and developing economies. Evidence in
the studying of the Nigerian economy has shown that there is some relationship existing
between the stock of money and economic growth or economic activity (Ikechukwu, 2012).
The findings by Ogunmuyiwa and Ekone support that aggregate money supply is positively
related to economic growth and development. Similarly, Ikhide and Alawode (1993)
concluded that reducing money stock through increased interest rates would lower gross
National product.
As already explained money supply is a critical component in the formulation of
monetary policy, so it is recorded and analyzed, then come out with policies by the central
bank. To increase in the supply of money, central bank typically lowers interest rates, which
in turns generates more investment and puts more money in the hands of consumers,
thereby stimulating spending and inflation (Woodford and WALSH, 2005). Businesses
respond by ordering more raw-materials and increasing production. The increased business
activity raises the demand for labor. In the same way, if the the money supply falls or when
its growth rate declines, businesses will respond by ordering less raw materials and
decreasing production. That is result to the lower demand for labor.

3. Characteristic of Malaysia
Malaysia is a South-East Asian country separated into two regions by the South
China Sea. The two parts are Peninsular Malaysia and Malaysian Borneo. Kuala Lumpur is
the capital city.

As of 2015, Malaysias total population stands at over 30.5 million (Statistics.gov.my,

2016). In 2016, Malaysia population is projected to increased by about 460,000 people and
reach 31,000,000 in the beginning of 2017 (Countrymeters.info, 2016). The natural increase
is expected to be positive, as the number of births will exceed the number of deaths by
369,000. If external migration will remain on the previous year level, the population will be
increased by 94,000 due to the migration reasons. It means that the number of people who
move into Malaysia (to which they are not native) in order to settle there as permanent
residents (immigrants) will prevail over the number of people who leave the country to
settle permanently in another country (emigrants).
The type of economic system in Malaysia is mixed economy. The characteristics of it
are an opened developing economy, middle income economy, and export dependent
economy. Its product`s exports are divided into main products, non-products, minor
product exports. The main products include electrical and electronic products, petroleum
and gas (14th biggest world gas producer), palm oil products, rubber products, timber
products; the minor products are cocoa products, pepper, pineapples, fruits, vegetable, and
horticulture; moreover, the non-products involve tourism, education, ICT, and consultancy.
The structure of Malaysia economy is based on export, and household consumption.
C + I + G + (Ex - Im) currently equals over $300 billion in Malaysia (Statistics.gov.my, 2016).
That means Malaysia produces more than $300 billion of goods and services within its
border. Spending by consumers, which economists call consumption or consumption
expenditure, is by far the largest part of the Malaysia GDP. Government spending on goods
and services averages about 14 percent, or one seventh, of total GDP. Net exports for
Malaysia are 9 percent. Yes, Malaysia exports a tremendous amount of goods (about 75%),
but it also imports a huge amount of goods (about 66%).
So the composition of GDP breaks down roughly as follows:
Consumption
Investment
Government
Exports
Imports

51%
26%
14%
75%
-66%
100%

4. Indicator
Gross Domestic Product (GDP)
Gross Domestic Product (GDP) is a monetary value of all the final goods and services
produced within a country in a period of time, quarterly or yearly (Callen, 2012). It includes
all of private and public consumption, government outlays, investments and exports less
imports that occur within a defined territory.
Gross Domestic product can be calculated using the following formula:
GDP = C + G + I + NX
According to the data released by Bank Negara on the monetary and financial
developments for January, it showed that M3 was lower compared to the same month last

year. The growth in M3 for January was even weaker than for December, when it grew by
2.7% and this has been weakening since last October. In the same way, M1 has also been on
a declining trend since last October. Taken together, both gauges can imply to GDP.
According to standard macroeconomic theory, a decrease in the supply of money leads to
less consumption and leading/borrowing. In the short run, this, but not always, correlated
to a decrease in total spending and, presumably, GDP. This decrease will shift the aggregate
demand (AD) curve to the left. In the diagram below, the Aggregate Demand curve shifts to
the left, from AD1 to AD2, so that total spending in the economy falls at every price level. At
P1, for example, real national income has fallen from Y1 to Y2 as a result of the inward shift
to the Aggregate Demand curve.

This graph shows the effect of lower money supply, which shifts aggregate demand (AD) to the left.

In the long run, if the bank Negara responded by using Expansionary Monetary policy
such as cutting the base rate, which means transferring some of the liquidity gain by making
loans less expensive to customers, then it would make a difference.
This increase will shift the aggregate demand curve to the right.

This graph shows the effect of expansionary monetary policy, which shifts aggregate demand (AD) to the right.

GDP Per Capita

GDP Per Capita is a measure of the total output of a country that takes Gross
Domestic Product (GDP) and divides it by the number of people in the country (,). GDP Per
Capita is especially useful when comparing one country to another, because it shows the
relative performance of the countries. A rise in GDP Per Capita signals growth in the
economy and tends to reflect an increase in productivity (,). It is also sometimes used as an
indicator of standard of living, with higher GDP Per Capita equating to a higher standard of
living (,).
GDP Per Capita can be calculated using the following formula:
GDP Per Capita = GDP / Population
According to the analysis of GDP as above, in the short time, GDP will decrease as
the money supply (M3) decrease. This links to the decrease of GDP Per Capita: when the
GDP goes up, GDP Per Capita goes up also. But in the long term, if the bank Negara
responded by using Expansionary Monetary policy such as cutting the base rate, GDP will
increase and it will result to increase of GDP Per Capita as well.

Inflation Rate
Inflation Rate is the rate which measure the rise in the general level of prices for
good and services over a period of time. It is usually measured as an annual percentage
increase.
Inflation is defined as a sustained increase in the general level of prices for goods
and services. As inflation rises, every dollar you own buys a smaller percentage of a good or
service.
The value of a dollar does not stay constant when there is inflation. As inflation rises,
every dollar you own buys a smaller percentage of a good or service. For example, if the
inflation rate is 2% annually, then theoretically a $1 pack of gum will cost $1.02 in a year.
After inflation, your dollar can't buy the same goods it could beforehand.
Inflation Rate = ((T2 - T1) / T1) x 100
When the money supply decrease, total spending in the economic decrease. The
lower total spending will shift the aggregate demand (AD) curve to the left. As the aggregate
demand (AD) curve shifts to the left, it changes the equilibrium point from E1 to E2. At the
new equilibrium point, price go down from P1 to P2. This results to the decrease of inflation
rate.

This graph shows the effect of lower money supply, which affect to the lower price level.

However, in the long run, if the bank Negara responded by using Expansionary
Monetary policy s. This increase will shift the aggregate demand curve to the right, it
changes the equilibrium point from E1 to E1. At the new equilibrium point, price go up from
P2 to P3. This results to the increase of inflation rate.

This graph shows the effect of lower money supply, which affect to the higher price level.

Unemployment Rate
Unemployment rate is defined most basically as the percentage of the total labor
force that is unemployed but actively seeking employment and willing to work (,). There are
many significances attached to this number. One is that the higher the number, the larger
strain on local, state, and federal budgets as funding requests for free healthcare, shelters,
police, food banks, etc. rises. Another is that a higher number means less money is going to
the government to pay for common good services (some named above). In brief,
unemployment rates are an indicator for a future tragedy of the commons.
Unemployment Rate is a relatively simple calculation:
Unemployment Rate = (Unemployed Workers / Total Labor Force) * 100

When the money supply decrease, total spending in the economic decrease. The
lower total spending will shift the aggregate demand (AD) curve to the left. As the aggregate
demand (AD) curve shifts to the left, the price level goes down. This results to the decrease
of inflation rate.

This graph shows the effect of lower money supply, which affect to the lower price level.

According to the theory of relationship between unemployment and inflation rate by

William Philips (1958) explained by using Philips curve graph said that the unemployment
and inflation has the inverse relationship; when unemployment is low, inflation rate is high.
In this case because of inflations increase, Unemployment Rate therefore decrease, from
U1 to U2.

This graph shows the relationship between unemployment and inflation rate; when inflation
rate increase, unemployment decrease.
However, in the long run, if the bank Negara responded by lowering interest rates, it
will cause a rise in total spending. Raising total spending will increase the price level from P2
to P3. This result to the increase of inflation. At last, when Inflation increases, the
Unemployment Rate decrease.

This graph shows the relationship between unemployment and inflation rate; when inflation rate
decrease, unemployment increase.

Quality of life
Measuring economic welfare is not an exact science. Often in economics we focus on
GDP statistics (measuring national output).
Quality of life depends on many other factors, apart from just GDP, such as
Distribution of Income in society, Employment / Unemployment (Unemployment is one of
main economic causes of low quality of life), Life Expectancy, Health care standards,
As talk about earlier, decrease of M1 and M3 correlated to a decrease in total
spending and, presumably, GDP. Lower investment spending cause unemployment to be
higher. Higher unemployment cause crime and social problems. All of these have an effect
on Quality of Life to become lower.

5. Industry Analysis
Business in different industry get a different effect from the changing of economic
climate. Some industry suffers enormously from economic recession, but some suffers just a
little bit. In the same way, some industry benefits numerously from economic growth, but
some benefits slightly.
The business can be divide into two groups based on the risk level: High-Risk industry
and Low-Risk industry.
1. High-Risk industry

Example of High-Risk industry is brokerage and investment bank, high-technology

product, construction, entertainment, travel accommodation, insurance, machinery, auto
parts, trucking, and tobacco.
2. Low-Risk industry
Example of Low-Risk industry is consumer goods, household product,
pharmaceutical, education, and agriculture product.
Based on my analysis earlier, I think Malaysia economic now is going to decline. The
industry will be boom is the industry that related to consumer goods, household product,
pharmaceutical, education, and agriculture product. For example, discount retailers. It
makes sense that, as budgets feel the strain of an economic downturn, people turn to the
store that offer the most for the least. In hard times, the discount retailers offer cheap
goods to customers. Producers of lower-end products also benefit from a sales upswing as
more people jump from brand names to make their paychecks go further. People may not
like discount retailers, but in a recession most people end up shopping there. While industry
will be suffering is the industry that related to brokerage and investment bank, hightechnology product, construction, insurance, machinery, auto parts, trucking,
entertainment, traveling and tobacco. For example, traveler accommodation. When theres
less money to go around, one of the first casualties for consumers is the travel budget. This
means that hotels and motels would see a sharp drop in the number of people checking in,
and this is exactly what happened in the lowest point of the recession.

6. Conclusion
Malaysia is a South-East Asian country. Kuala Lumpur is the capital city. Malaysias
total population stands at over 30.5 million this year and is projected to increased by about
460,000 people and reach 31,000,000 in the beginning of 2017 (,). Additional, it is projected
that Malaysia will become an ageing population in 2021 when the population aged 65 years
and over reach 7.1 per cent.

The type of economic system in Malaysia is mixed economy. The characteristics of it

are an opened developing economy, middle income economy, and export dependent
economy.
The structure of Malaysia economy is based on export, and household consumption.
Malaysias GDP currently equals over $300 billion (,). The composition of GDP breaks down
roughly as 51% Consumption, 26% Investment, 14% Government, and 9% Net Export.
From my own view, Malaysias economy for next year 2017 will be effected by this
incidence. The lower money supply will make the Malaysias overall economic growth to be
lower.
The general economic indicators justify my predictions as follow:
GDP
According to standard macroeconomic theory, a decrease in the supply of money
leads to less consumption and leading/borrowing. In the short run, this, but not always,
correlated to a decrease in total spending and, presumably, GDP. In the long run, if the bank
Negara responded by using Expansionary Monetary policy such as cutting the base rate, it
would increase GDP.
GDP Per Capita
According to the analysis of GDP as above, in the short time, GDP will decrease as
the money supply decrease. This links to the decrease of GDP Per Capita. But in the long
term, if the bank Negara responded by using Expansionary Monetary policy such as cutting
the base rate, GDP will increase. Hence, it results to increase of GDP Per Capita as well.
Inflation Rate
As GDP decreases, it shifts the aggregate demand (AD) curve to the left. When the
Aggregate Demand (AD) curve shifts to the left, it changes the equilibrium point from E1 to
E1. At the new equilibrium point, price go up from P1 to P2. So, the inflation rate decrease.
However, in the long run, if the bank cut the base interest rate, GDP will increase.
The aggregate demand (AD) curve will shift to the right. At the new equilibrium point, price
go up from P2 to P3. So, the inflation rate increase.
Unemployment Rate
According to the analysis of Inflation as above, in the short time, the inflation rate
decrease. The unemployment and inflation has the inverse relationship. So, when the
inflation rate decrease, the Unemployment Rate increase.
However, in the long run, the inflation rate increase. Therefore, the Unemployment
Rate increase.
Quality of Life
Lower money supply is correlated to a decrease in total spending and, presumably, GDP.
Lower investment spending cause unemployment to be higher. Higher unemployment
cause crime and social problems. All of these have an effect on Quality of Life to become
lower.

Based on my analysis as above, I think Malaysia economic now is going to decline.

The industry will be boom is the industry that related to consumer goods, household
product, pharmaceutical, education, and agriculture product. While industry will be
suffering is the industry that related to brokerage and investment bank, high-technology
product, construction, insurance, machinery, auto parts, trucking, entertainment, traveling
and tobacco.

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