PRINCIPLES OF MACROECONOMICS (BBEK4203)

FACULTY OF BUSINESS & MANAGEMENT

SEMESTER 5 / 2013

BBEK4203

PRINCIPLES OF MACROECONOMICS

NAME : AMIR BIN TOMPONG

MATRICULATION NO: 860704495583001

IDENTITY CARD NO. : 860704495583

TELEPHONE NO. : 013-8899761

E-MAIL : mirtoms@yahoo.com

LEARNING CENTRE : Tawau Learning Centre

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TABLE OF CONTENTS

Contents Page

1.0 INTRODUCTION 2
1.0.1 Definition of Macroeconomics 2
1.0.2 Issues in Microeconomics 3
1.0.3 Microeconomics Policies 4
1.0.4 Objective of Microeconomics 6
2.0 ECONOMICS GROWTH & STANDARD OF LIVING 7
2.0.1 Factor Effecting Economics Growth & Standard of Living 8
2.0.2 Economic Growth In Malaysia 9
3.0 UNEMPLOYMENT 10
3.0.1 Definition 10
3.0.2 Type of Unemployment 10
3.0.3 Unemployment Rates in Malaysia 12
4.0 INFLATION 14
4.0.1 Definition 14
4.0.2 Inflation Rates in Malaysia 15
5.0 CONCLUSION 17

REFRENCE 18

1.0 INTRODUCTION
1.0.1 Definition of Macroeconomics

Macroeconomics is an analysis of a country economic structure and performance

and the government policies in affecting its economic conditions. Economists are

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interested in knowing the factors that contribute towards a country economic growth
because if the economy progresses, it will provide more job opportunities, goods and
services and eventually raise the people standard of living. Macroeconomics can progress
as it tests a particular theory to see how the overall economy functions, whereby the
theory is used to forecast the effects of a particular policy or event.

Other than that, microeconomics is field of economics that studies the behavior of
the aggregate economy. Macroeconomics examines economy-wide phenomena such as
changes in unemployment, national income, rate of growth, gross domestic product,
inflation and price levels. Economists define macroeconomics as a field of economics
that studies the relationship between aggregate variables such as income, purchasing
power, price and money. This means macroeconomics examines the function of the
economy as a whole system, looking at how demand and supply of products, services and
resources are determined and factors that influence them.

Macroeconomists also study about the aggregated indicators such as GDP and
GNP. Macroeconomics encompasses a variety of concepts and variables, but there are
three central topics for macroeconomic research. Macroeconomic theories usually relate
the phenomena of output, unemployment, and inflation. Outside of macroeconomic
theory, these topics are also extremely important to all economic agents including
workers, consumers, and producers.

1.0.2 Issues in Microeconomics

There is several issues in microeconomics. The issues are follows :

a) What are the Determinants of Economic Growth and Living Standards in

a Country?

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Since a century ago, developed nations have achieved a high rate of

economic growth, which in turn has raised their people standard of living.
Macroeconomics examines the reasons behind the speedy economic growth in
the developed nations and understands the reason why this growth is different
between the various countries.

b) Productivity
The average labour productivity or the output of a single worker is
important to determine the standard of living. Macroeconomics will inquire
into the factors that decide on the growth rate of employee productivity.

c) What is the Cause of Decline and Growth in an Economy?

Any economy will surely go through decline and growth. In relation to

this, macroeconomics will look at the causes of these changes in the economy
and the government policies that can be implemented to overcome an
economic problem.

d) What Factors Affect Unemployment?

What does rate of unemployment mean? Rate of unemployment means

there is an available work force that wants to work but has no jobs. The rate of
unemployment will increase when there is a decline in the economy, but
unemployment also happens when the economic situation is good.
Macroeconomics will examine the reasons for unemployment, types of
unemployment and ways to overcome unemployment.

e) What Factors Cause the General Price Levels or Inflation to Rise?

What does inflation mean? Inflation is an increase in the general price

level and is usually measured by looking at changes in the Consumer Price
Index. The questions asked in a macroeconomic analysis are:

(i) What factors affect inflation?

(ii) Why does the inflation rate differ from time to time?

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(iii) Why does the inflation rate differ from one country to another?

1.0.3 Microeconomics policies

The study of macroeconomics relates to the economic growth of a country.

Although many factors, such as natural resources, human resources, capital stocks,
technology, and people choice of economy, contribute towards economic growth,
government policies also play an important role. Therefore, it is also important for you to
understand the effects of the many government policies on the economy and the need to
develop better policies as this is an important aim in macroeconomics. Macroeconomic
policies affect the overall performance of the economy. There are two main
macroeconomic policies, namely, the financial, or monetary policies, and fiscal policies.
However, there are also other policies that can be used by the government to influence the
economic performance of a country. They are income policies and supply side policies.

a) Financial Policy/Monetary Policy

Economists believe that changes in the money supply will influence

important macroeconomic variables such as national output, labor force,
interest rate, inflation, share prices and foreign currency exchange. Financial
policy is controlled by the central bank, which acts as a government agency
(in Malaysia it is deal with Bank Negara)

b) Fiscal Policy

The tools used in fiscal policy are taxes and government expenditure. A
good balance between government expenditure and government revenue is
important. When the government spends more than the income tax collected,
it suffers a budget deficit. Meanwhile, if the government revenue is more than
its expenditure, then the government will have a budget surplus.

c) Income Policy

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This policy is used by the government to control prices and wages. The
government will specify the maximum amount by which prices and wages are
allowed to rise. Government and firms/labor unions sometimes negotiate on
the price and the wage-setting behavior.

d) Supply-Side Policy

This policy focuses on the aggregate supply and on how the production
could be increased. The main instrument of the supply side policy is the tax
system. With a reduction on personal taxes, workers are encouraged to work
more and therefore increase labor supply.

1.0.4 Objectives of microeconomics

According to the economist, there is several objectives of microeconomics.

Microeconomics objectives are :-

a) Achieving full Employment

This does not mean that there will be no unemployment at all or that the
rate of unemployment will be zero in a country. Basically, economists agree
that there can still be unemployment although the economy is at a level where
it has achieved full employment, meaning that those who are able and willing
to have a job can get one.

b) Price Stability

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Generally, price stability means there are no changes in general price

levels. This also means that the prices of some goods and services may
increase, while some other prices may drop at the same time. When prices
remain largely stable, there is no rapid inflation or deflation.

c) Good Economic Growth

Achieving good economic growth is also one of the aims of

macroeconomics. This would mean there is an increase in the real per capita
income from year to year.

d) Rapid International Trade Activities

All countries participating in international trade want to benefit from

specialization and trade. Empirical studies have shown that those countries
that are actively involved in international trade benefit in terms of more
production output and higher consumption levels.

2.0 ECONOMICS GROWTH & STANDARD OF LIVING

Economic Growth is the increase in the market value of the goods and services
produced by an economy over time. It is conventionally measured as the percent rate of
increase in real gross domestic product, or real GDP. Of more importance is the growth of
the ratio of GDP to population (GDP per capita) which is referred to as intensive growth.
GDP growth caused only by increases in population or territory is called extensive
growth. As an area of study, economic growth is generally distinguished from
development economics. The former is primarily the study of how countries can advance
their economies. The latter is the study of the economic aspects of the development
process in low-income countries. Changing in economic growth can change standard
living in the country. Since economic growth is measured as the annual percent change of
gross domestic product (GDP), it has all the advantages and drawbacks of that measure.

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For example, GDP only measures the market economy, which tends to overstate growth
during the change over from a farming economy with household production. An
adjustment was made for food grown on and consumed on farms, but no correction was
made for other household production. Also, there is no allowance in GDP calculations for
depletion of natural resources.

Standard of living refers to the level of wealth, comfort, material goods and
necessities available to a certain socioeconomic class in a certain geographic area. The
standard of living includes factors such as income, quality and availability of
employment, class disparity, poverty rate, quality and affordability of housing, hours of
work required to purchase necessities, gross domestic product, inflation rate, number of
vacation days per year, affordable (or free) access to quality healthcare, quality and
availability of education, life expectancy, incidence of disease, cost of goods and
services, infrastructure, national economic growth, economic and political and stability,
political and religious freedom, environmental quality, climate and safety. The standard
of living is closely related to quality of life.

Standard of living is generally measured by standards such as real income per

person and poverty rate. Other measures such as access and quality of health care, income
growth inequality, Disposable Energy (people's disposable income's ability to buy energy)
and educational standards are also used. Examples are access to certain goods (such as
number of refrigerators per 1000 people), or measures of health such as life expectancy. It
is the ease by which people living in a time or place are able to satisfy their needs and/or
wants.

2.0.1 Factor Affecting Economic Growth & Standard Of Living

The primary driving force of economic growth is the growth of productivity,

which is the ratio of economic output to inputs (capital, labor, energy, materials and
services). Increases in productivity lower the cost of goods, which is called a shift in
supply. By John W. Kendrick’s estimate, three-quarters of increase in U.S. per capita
GDP from 1889-1957 was due to increased productivity. Over the 20th century the real

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price of many goods fell by over 90%. Lower prices create an increase in aggregated
demand, but demand for individual goods and services are subject to diminishing
marginal utility. Additional demand is created by new or improved products.
Demographic factors influence growth by changing the employment to population ratio
and the labor force participation rate. Other factors include the quantity and quality of
available natural resources, including land. Other than that, factor that will affecting
standard of living in a country is, when the GDP are changing. If GDP in a country get
decreased, automatically it will effecting the standard of living.

2.0.2 Economic growth in Malaysia

Figure 1 : Malaysia Real Output

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Based on Figure 1, we can see that there has been a steady increase in the country
output whereas there was a decline in the economy from 1985 to 1986 (commodity price
crisis); from 1997 to 1998 (Asian financial crisis) and from 2008 to 2009 due to the
global economic crisis.

3.0 UNEMPLOYMENT

3.0.1 Definition

Unemployment is the condition of willing workers lacking jobs or "gainful

employment". In economics, unemployment statistics measure the condition and extent
of joblessness within an economy. A key measure is the unemployment rate, which is the
number of unemployed workers divided by the total civilian labor force. The
unemployment rate is also used in economic studies and economic indexes such as the
Conference Board’s Index of Leading Indicators. Unemployment in an economic sense
has proved a surprisingly difficult thing to define, let alone "cure".

The terms unemployment and unemployed may sometimes be used to refer to

inputs to production that are not being fully used (apart from labor) — for example,
unemployed capital goods. In its most general, but uncommon usage, unemployment
might also denote objects not put to productive use.

3.0.2 Type of Unemployment

There is several type of unemployment. The type of unemployment is :-

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a) Frictional unemployment

Frictional unemployment is unemployment that occurs because it takes

workers some time to move from one job to another. While it may be the case
that some workers find new jobs before they leave their old ones, a lot of
workers leave or lose their jobs before they have other work lined up. In these
cases, a worker must look around for a job that it is a good fit for her, and this
process takes some time. During this time, the individual is considered to be
unemployed, but unemployment due to frictional unemployment is usually
thought to last only short periods of time and not be specifically problematic
from an economic standpoint. This is particularly true now that technology is
helping both workers and companies make the job search process more
efficient. Frictional unemployment can also occur when students move into
the work force for the first time, when an individual moves to a new city and
needs to find work, and when women re-enter the work force after having
children.

b) Cyclical unemployment

It's probably not surprising that unemployment is higher during recessions

and depressions and lower during periods of high economic growth. Because
of this, economists have coined the term cyclical unemployment to describe
the unemployment associated with business cycles occurring in the economy.
Cyclical unemployment occurs during recessions because, when demand for
goods and services in an economy falls, some companies respond by cutting
production and laying off workers rather than by reducing wages and prices.
(Wages and prices of this sort are referred to as "sticky.") When this happens,
there are more workers in an economy than there are available jobs, and
unemployment must result. As an economy recovers from a recession or
depression, cyclical unemployment tends to naturally disappear. As a result,
economists usually focus on addressing the root causes of the economic
downturns themselves rather than think directly about how to correct cyclical
unemployment in and of itself.

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c) Structural unemployment

There are two ways to think about structural unemployment. One way is
that structural unemployment occurs because some labor markets have more
workers than there are jobs available, and for some reason wages don't
decrease to bring the markets into equilibrium. Another way to think about
structural unemployment is that structural unemployment results when
workers possess skills that aren't in high demand in the marketplace and lack
skills that are in high demand. In other words, structural unemployment
results when there is a mismatch with workers' skills and employers' needs.
Structural unemployment is thought to be a pretty significant problem, mainly
because structural unemployment tends to be largely of the long-term variety
and retraining workers is not a cheap or easy task.

d) Seasonal unemployment

Seasonal unemployment is, not surprisingly, unemployment that occurs

because the demand for some workers varies widely over the course of the
year. (Pool lifeguards, for example, probably experience a decent amount of
seasonal unemployment.) Seasonal unemployment can be thought of as a form
of structural unemployment, mainly because the skills of the seasonal
employees are not needed in certain labor markets for at least some part of the
year. That said, seasonal unemployment is viewed as less problematic than
regular structural unemployment, mainly because the demand for seasonal
skills hasn't gone away forever and resurfaces in a fairly predictable pattern.

3.0.3 Unemployment Rates in Malaysia

Unemployment in Malaysia is becoming increasingly serious. Every year many

students have graduated from institutions of higher learning either in public or private
institutions. A lot of competition for jobs in causing high unemployment. Lack of
employment factors there is also a source of unemployment. Competition that exists is
there in getting employment in government and private sector. Many graduates more

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interested in public and private sector to the government because they consider is more
efficient and secure the future.

Figure 2 : Unemployment rate in malaysia

According to the figure 2, in 2005 there is about 3.534 of the unemployment rate.
In 2006 the unemployment rate are decrease to 3.327. But in 2008 until 2009
unemployment rate are increasing from 3.3 until 3.6, which is the highest increase from
2005 until 2010.

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4.0 INFLATION
4.0.1 Definition

Inflation is a persistent increase in the general price level of goods and services in
an economy over a period of time. When the general price level rises, each unit of
currency buys fewer goods and services. Consequently, inflation reflects a reduction in
the purchasing power per unit of money a loss of real value in the medium of exchange
and unit of account within the economy. A chief measure of price inflation is the inflation
rate, the annualized percentage change in a general price index (normally the consumer
price index) over time.

Inflation's effects on an economy are various and can be simultaneously positive

and negative. Negative effects of inflation include an increase in the opportunity cost of
holding money, uncertainty over future inflation which may discourage investment and
savings, and if inflation is rapid enough, shortages of goods as consumers begin hoarding
out of concern that prices will increase in the future. Positive effects include ensuring that
central banks can adjust real interest rates (to mitigate recessions), and encouraging
investment in non-monetary capital projects.

Inflation occurs due to an imbalance between demand and supply of money,

changes in production and distribution cost or increase in taxes on products. When
economy experiences inflation, i.e. when the price level of goods and services rises, the
value of currency reduces. This means now each unit of currency buys fewer goods and
services. It has its worst impact on consumers. High prices of day-to-day goods make it
difficult for consumers to afford even the basic commodities in life. This leaves them
with no choice but to ask for higher incomes. Hence the government tries to keep
inflation under control.

Contrary to its negative effects, a moderate level of inflation characterizes a good

economy. An inflation rate of 2 or 3% is beneficial for an economy as it encourages
people to buy more and borrow more, because during times of lower inflation, the level
of interest rate also remains low. Hence the government as well as the central bank
always strive to achieve a limited level of inflation.

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4.0.2 Inflation rate in Malaysia

Figure 3: Inflation rate in Malaysia

Historically, from 2005 until 2012, Malaysia Inflation Rate averaged 2.8 Percent
reaching an all the time high of 8.5 Percent in July of 2008 and a record low of -2.4
Percent in July of 2009. In this Figure 3 chart, above includes historical data for Malaysia
Inflation Rate. Since Malaysia has closed relationship with other international
counterparts, in particular the Asian partners in term of trade and investment, the
general inflation happening in Asia would also press the Malaysia economy to suffer
from inflation as well. For examples, Inflation in South Korea, Asia’s fourth-biggest
economy, hit 4.2 per cent in December 2011, unchanged from November and above the
government’s 4 per cent target. And in case of Vietnam, which had Asia’s highest
inflation rate in 2011 at 18 per cent, the Communist government appears to be once
again favoring growth over inflation. In Indonesia, Asia’s third-most-populous country,
falling inflation has freed up the central bank to continue cutting interest rates. Inflation
fell in December, the fourth straight month of declines, to 3.8 per cent, the lowest level
since early 2010 but it is still higher than Malaysia’s about 2 per cent inflation . And
because of the general high inflation in the Asian countries, their products exported
would also price at a higher level and industries depending on these products as
production materials would have to follow the higher material price and raise the good
prices which increase the pressure for inflation increases.

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Other than that , The government of Malaysia announced a revamp in its fuel
subsidy system, raising petrol prices by 41% to MYR2.70/ liter and diesel by 63% to
MYR2.58/liter effective June 5. Under huge political pressure, the government said that
there will not be further hike in retail fuel prices in the same year but the price will be
reviewed monthly. In other words, the price would be adjusted monthly based on the
global oil price based on a formula: 30-sen per liter discount from market prices. Though
the government will be giving out yearly cash rebate of MYR625 to owners of cars with a
capacity below 2000 cc, its decision to raise the fuel price did contribute to the inflation
in the economy .

Malaysia in 2010 unveiled a bold initiative to transform the economy over the
next decade, creating 3.3 million jobs and propelling the country towards developed-
nation status. The ambitious agenda, aimed at ensuring Malaysia does not fall into the
“middle-income trap”, would see gross national income grow six percent annually to hit
523 billion US dollars by 2020, up from 188 billion US dollars in 2009. The programme is
to be powered by a targeted total investment of 444 billion US dollars embracing 133
projects, with 92 percent of the funding coming from the private sector
(channelnewsasia.com 2010). With the ambitious economy plan in the coming decade
after the release of the plan, inevitably there will be an increase of the aggregate
demand in the economy which is contributed by both the increased government
expenditure as well as the business firms’ demand through increased scale of
investment in the coming years.

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5.0 CONCLUSION

Macroeconomics is the most important thing for any country, because it allows us
to understand how the economy works as a whole and it helps to understand the
functioning of a complicated modern economic system. It describes how the economy as
a whole functions and how the level of national income and employment is determined
on the basis of aggregate demand and aggregate supply. Other than that it helps to
achieve the goal of economic growth, higher level of GDP and higher level of
employment. It analyses the forces which determine economic growth of a country and
explains how to reach the highest state of economic growth and sustain it and can helps
to solve economic problems like poverty, unemployment, inflation, deflation.
Macroeconomics also helps to bring stability in price level and analyses fluctuations in
business activities. It suggests policy measures to control inflation and deflation. When a
country cannot control the inflation, when it is high, the markets operate at a much lower
capacity. Borrowers suffer and lenders lose money on defaulted loans. Other than that, by
learn macroeconomics, we can know how to get an higher lever GDP for our country. It is
because GPD can tells about the present economic status of a country in terms of
monetary. The Gross Domestic Product is the total sum of all the economic goods that are
giving benefits to the country. A country with a high GDP will have improved standard of
the economy and the vice versa is true.

REFFERENCE

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Malaysia GDP Growth Rate

http://www.tradingeconomics.com/malaysia/gdp-growth

Malaysia Gross National Income

http://www.tradingeconomics.com/malaysia/gross-national-product

Introduction to Macroeconomics, Robert M.Kunst (March 2006)

Blaug, Mark (2002). "Endogenous growth theory". In Snowdon, Brian; Vane, Howard. An
Encyclopedia of Macroeconomics. Northhampton, Massachusetts: Edward Elgar Publishing.
ISBN 978-1-84542-180-9.

Statistics on the Growth of the Global Gross Domestic Product (GDP) from 2003 to 2013, IMF,
October 2012.

O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in Action. Upper Saddle
River, NJ: Pearson Prentice Hall. p. 330. ISBN 0-13-063085-3.

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