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Examine Malaysias Inflation Rate Economics Essay

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Published: Mon, 5 Dec 2016

Based on the topic given, we are ordered to examine the Malaysias inflation rate over the past 10 years by knowing the factors that contribute the inflation and the measures taken by the Malaysia’s government to overcome or combat the inflation. In general, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level increases, each unit of currency buys fewer goods and services. Meanwhile, inflation rate is the annually increase of percentage in the price of goods and services. When the price level rises rapidly, the inflation rate is high, and when the price level ri

Examine Malaysia’s inflation rate over the past 10 years and discuss its trends.

Inflation can be defined as one of the phenomena of general price level rises steadily in the long run and no limitations. For the past 10 years of Malaysia’s inflation, we decided to analyze from the year 2003 until year 2012.

The graph shows the inflation rate in Malaysia from the year 2003 to 2012. It can clearly be seen that there has been a highest rate in year 2008 by 5.4 percent while the lowest rate by 0.6 percent in year 2009 then Malaysia’s inflation rate became normalized to the 3.2 percent in year 2011.

According to The Department of Statistic Malaysia, which is one of the department that responsible to analyze the inflation rate in Malaysia was recorded the average 1.70 percent in October 2012. While, in year 2003 indicates the inflation rate was 1.1 percent. After that, the slow growth shows the difference between year 2003 and 2004 was 0.3 percent. It is mean that in year 2004, the rate of inflation increase to 1.4 percent. Then, it rises considerably over year 2005 by 3.0 percent. It is shows that starting in year 2005, the inflation rate increased rapidly from year 2004 which is the difference was about 1.6 percent. Continually in year 2006, it has been a steady increased, with around 3.6 percent rate of inflation.

Suddenly, the rate falls by 2.0 percent in year 2007 because of the certain factors that can affect the rate of inflation. Next, the rate rose dramatically by 5.4 percent in 2008 due of the increasing in fuel prices on that time. The rate does not longer because in 2009 it decreased by 0.6 percent. Malaysia’s inflation rate starts continuously slightly increased to 1.7 percent in year 2010. The rate slowly goes up in 2011 by 3.2 percent. However, the inflation rate in Malaysia was recorded at 1.30 percent in September of 2012.

To sum up, the overall years from 2003 to 2012, it shows that the trend for inflation rate over the past 10 years is fluctuated trend. From starting year at year 2003 to 2006, the graph shows slowly increased and achieved the highest rate between these four years in year 2006. After that, the graph drops in year 2007 and rise largely in year 2008. In year 2009, the rate of inflation falls dramatically and starts increased back in 2010 and 2011. But the rate still decreased in September 2012. As a conclusion, the lowest rate was 0.6 percent in year 2009 while the highest rate was showed as much 5.4 percent in 2008. In whatever way, the government has decided to decrease the inflation rate and became normalized in 2011.

What may be some of the factors that contribute to the inflation rate trend?

In Malaysia, inflation rate shows the fluctuated of the inflation rate trend. It was indicated that the highest inflation rate between years 2003 to 2012 was 5.4 percent in 2008. By the way, during year 2009, the rate was dramatically goes to 0.6 percent and the trend was normalised back to the 3.2 percent in year 2011.

By referring the Keynesian theory, the three type of inflation which is demand-pull inflation, cost-pull inflation, and built-in inflation. Based on the inflation rate trend between 2003 to 2012 in Malaysia, there are may be some of the factors that contribute to this inflation trend, such as the factor that can affected the aggregate demand and aggregate supply that nearly can affect the inflation in many ways. For example, quantity of money that government print, the interest rate, the government expenditure, the tax cut, the increasing of Purchase Power Parity and an increase in money prices of raw material and wage rate.

In this country, the inflation rate measures a board rise or fall in prices that consumers pay for a standard basket of goods. The highest inflation rate was at 5.4 percent in 2008 because of the increasing in raw material such as fuel prices. When the fuel prices increased, then the firms will decrease their supply of goods and services. This will lead to the increase in price of other goods and services that will contribute to the inflation in the country. This situation proved when the world price of fuel was increase, the price of goods such as household goods will also increase. In addition, the fuel price is decided by the government, however, government must take it seriously when decide to increase the fuel price. This may cause two negative effects towards the consumers. Firstly, for instance, as a big population of Malaysian society owns a car, the increase in a fuel price, will increase the cost of the car users. Secondly, the overall operating cost of doing business in Malaysia will also increase due to the higher cost of fuel.

The quantity of money that the government print will increase the money supply which one of the major factors that contribute to the inflation. This is because the higher the money supplied, the higher the inflation rate. For example, if the government cuts the interest rate, this will cause the quantity of money increase. Since a lot of money in the market, the production of goods will decrease because the demand of the products is higher. Most of government today control their money supply. As more money offered in the market, the highest the inflation especially through printing more bills. The printing of new money allows goods to be purchased without the real exchange.

On the other hand, when the money supplied is higher in the economy, this make the consumption and investment also increase and there are more job opportunities and this will encourage the growth of economy in the country. An increasing in money wage rate also contributed to the inflation. As many of labour work in the country, then the higher the wage for one unit of force. Therefore, to increase the output of the country, the more of labour will be used and the higher the marginal cost of labour, the price had to be raised. As the wages are high, aggregate supply in the economy will decrease and this will contributed to the inflation occurs.

In addition, the increasing of purchase power parity (PPP) is also one of the factors that contribute to the inflation rate trend. Purchase power parity means the equal value of money. When there were increasing in purchase power parity, consumer’s demand of the goods and services is also increase. However, the goods and services offers in the market become less.

Moreover, the other factors are the increasing in the government expenditure and the tax cut from the government. Firstly, an increasing in government expenditure. Government expenditure can be divided into two, which are operating expenditure and development expenditure. An increasing in the government expenditure can encourage the increasing in the aggregate demand and at this time, the price level will continually increase. Secondly, the tax cut. If the government cut the tax, then demand will increase due to the cut in price of goods and services, the continuous increase in aggregate demand in the economy and have reached full employment will impact, the price level will increase.

Hence, any factor that increases aggregate demand can cause inflation. However, in the long run, the government can overcome this problem by increasing the quantity of money in circulation faster than real growth rate of the economy.

All of all, it can be said that, all the factors stated above can contribute to the inflation occurs. Based on the inflation trend between the last ten years, the trend shows fluctuated trend over the ten years. Generally, during the past ten years, the inflation is already become lower and moderate inflation after our country faced the high rate of inflation, called hyperinflation during the economic crisis. Hyperinflation is caused by an excessive growth of the money supply and refers to the growth of higher price level and the growth is continuously increased.

The rate of inflation in Malaysia may at low or moderate inflation that contribute the fluctuation trend during the last ten years. This trend occur when the money supply growing faster than the rate of economic growth.

Measures undertaken

There are some measures are undertaken by our government in order to combat inflation in Malaysia. One of the actions taken by our government is supporting small and medium enterprises (SMEs) in the market. Small and medium enterprises are important for every country because they can help to boost up a country’s economic growth. As we know one of the factors that cause inflation is demand-pull inflation which means a demand of a good or service increases in the market, but the supply of the particular good and service remain the same due to the number of supplier is limited in producing the product and service. Therefore the price of the product or service will rise as the demand is higher than supply and this will cause the consumers need to pay more in order to satisfy their needs. Hence inflation occurred.

In order to solve this problem, our Malaysia government is implementing Special Government Funds for small and medium enterprises (SMEs). The main purpose of these funds which provided by our government is to develop and nurturing more small and medium enterprises in our country in order to increase the productivity of products and services in Malaysia. In year 2007, Malaysia has provided 105 Special Government Funds for small and medium enterprises with a total amount of RM31.8 billion.

For example, our central bank, Bank Negara Malaysia has allocated a total of RM 6.75 billion is small and medium industries 2, RM 2.85 billion in new entrepreneurs and also RM 1.30 billion in food industries. Besides that, Micro Enterprise Fund (MEF) has launched by our central bank in year 2008 and this is to help those enterprises which started up with a small capital and less employers able to operate their business in the business market. Bank Negara Malaysia has approved to use RM4.2 million to help mirco enterprises and there are 241 micro enterprises get benefits from Micro Enterprise Fund (MEF) in year 2008.

Through these fund provided by our government, there are more mirco, small and medium enterprises producing products and services in the market. Therefore, productivity of Malaysia will increase and it solved the problems of demand-pull inflation.

Moreover, our central bank, Bank Negara Malaysia applied monetary policy to combat inflation. Deposit interest rate is also one of the ways to combat the inflation in our country, Bank Negara Malaysia is responsible to set a most suitable interest rate on a specific time for money saver. For example, when there is high inflation rate in our country, Bank Negara Malaysia will need to adjust the deposit interest rate to higher rate in order to encourage people to save more their money in the bank and indirectly to reduce the quantity amount of money in the market which can prevent the value of our money to become less value. Besides that, since the interest rate has increased, this will discourage investors and firms to borrow money from the banks. Therefore, it will reduce the investment and consumption in the market and consequently the inflation rate will decrease.

Year

2004

2005

2006

2007

2008

2009

2010

2011

Average interest rate

2.69

2.84

3.51

3.50

3.51

2.11

2.56

2.88

Based on the graph and table above, we can see that as our country’s inflation rate increases, the interest rate offered by the bank increases as well in order to encourage people to save money in the bank to reduce the quantity of money in the market in order reduce the inflation rate. Due to the economic Stimulus Package, the interest rate is still high even though the inflation rate in year 2007 has decrease from year 2006.

Conclusion


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