Part A
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 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.
Part B
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 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.
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 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.
Explanation of changes in Malaysia’s exports and its reasons
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.
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;
- 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 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.
- 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.
a) 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.
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
- 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.
- 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.
- 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.
b) The three groups in the economy that will be impacted by the inflation negatively are listed below;
Equity holders and Investors:
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.
Effects of weak ringgit on local businesses and consumers
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.
2.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).
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.
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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