Merits And Demerits Of Market Economy Economics Essay
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Market economy is the system of allocating resources based only on the interaction of market forces like supply and demand. A true market economy is free of governmental influence, collusion and the other external inferences.
A Market economy has seven major features as follows:
People purchase what they want, but just if they can afford it.
Therefore, money becomes essential for life.
In order to get money, people are forced to do anything and to sell anything.
The main goal for all production and investments are to have maximum profit than having social needs satisfied.
Other people (as in slavery and feudalism) no longer exercise discipline over those who produce the wealth of society but by money and the conditions of work that one must accept in order to earn money.
Sharing of limited goods happen through money (based on who has more than the others do) rather than through coupons (according to work harder or longer or has a greater need for the good).
While everyone is paid for, what they do and not to keep from trying to get rich, people get a sense that everyone gets what he reserves economically, in general, rich and poor both are responsible for their destinies.
Market economy has some significant advantages and disadvantages and there is no matter that the society is developed or underdeveloped. There are some important advantages as follows:
Between different companies, competition leads to increase competence, as companies do whatever that is needed (containing fire workers) in order to have lower costs.
Most of the people work hard (the important threat of losing job for someone could be the greater motivator).
There is more innovation as firms look for new products to sell and cheaper ways to do their work;
When there is a new opportunity to earn profit, the foreign investments are attracted.
The power, cost, and size of the state bureaucracy are reduced equally as various activities, which are typically connected with the public sector that are taken over by private ventures.
The rapid production or at least those who are involved in making those things that people want to buy by money at home or abroad, cause to increase development.
Too many people rapidly purchase the technical and social skills and necessary knowledge to do in this new economy.
A wide variety of different consumer goods is very available for those people who have money to buy.
Large parts of the society take on a bright, merry and colorful air as everyone busies himself trying to sell something to someone else.
In addition, there are important disadvantages just as follows:
The priority of distorted investment as wealth is directed into what people get as greater profit and what they really need and want.
The more profit from the employer when is the worst exploitation of workers that the longer, faster, and harder people work.
The overproduction of goods while workers are never paid enough, when they are in their role of consumers, to buy them back (in the age of computerization, robotization, and automation, the gap between what they produce and what is their lower wages amount, which allows them to consume has increased extremely.
The capacity of industrial, which is unused ( the verdict of a large percentage of machinery of all kinds that are idle, is the huge amount of unsold goods when many needs are dissatisfied).
Growing rate of unemployment (no machines could make profit for owner when raw materials are accessible but could not satisfy those people that cannot afford for what could be made for them).
Growing social and economic inequality (in this circumstances the poor get poorer and rich get richer and we have the deeper gap in social classes).
With this kind of gap between rich and poor, egalitarian social relations become unfeasible (those people who are rich and have too much money think that they are better than everyone else, when the poor people feel hatred toward them).
Those people who have the most money still exercise to earn and make more and more.
Increasing the corruption in all society's sectors because of increasing the power of those people who have more money in order to bribe officials to whom have not, at a harsh disadvantage.
Increasing crimes in all kinds of economic because of those people who are trying to make money illegally when legal is not accessible.
Reducing social benefits and welfare (while such benefits are financed at least in part by taxes, expanded benefits usually means reduced profits for the rich; in addition, any social security net makes workers less scared of losing their works and accordingly less enthusiastic to do anything to keep them);
Worsening ecological degradation (while any attempt to improve the quality of the air and water need costs for the owners of industry and consequently reduce the profits, so we cannot live in our natural home).
With all this, misunderstand will occur by different social classes about the arising the new social relationship and powers through the performances of a market economy as an usual occurrence with a life and will of their own (for example, money get approximately power, which stands above people and guide their lives, rather than a vehicle into those people through their estranged relations with their productive activity. consequently, the market itself keep the basic human nature than any other possibilities. As a result, people get discourage of their ability or having different qualitatively future. In short, what Marx called "ideological thinking" becomes general).
The same market experiences expand a set of anti-social manners and feelings (people become self-centered, worried only about themselves. "Me first", "anything for money", "winning in competition no matter what the human costs" become what drives them in all areas of life. They also become very nervous and economically insecure, frightened of losing their work, their home, their sale, etc.; and they concern about money all the time. In this circumstances, emotions as well as ideas of collaboration and mutual concern are critically weakened, where they don't vanish altogether, for in a market economy it is against one's personal interest to collaborate with others);
It will be become very difficult for any government to give the people the right picture of the country's problems when people's thinks and emotions are affected by their life in a market economy (it is more caused to illusion people with the growth rate of economy. By depending on "favorable market psychology", the government could not be honest with its own people or even the rest of the world on what is exactly happening in the country).
In conclusion, the market economy leads to periodic economic crisis, where all of the disadvantages expand in a way that all of the advantages above will be completely dried. The growth rate of economy will be stopped, fewer things are going to be made, development of productions will be slowed down, investment will drop off, etc.
Q2. Explain the concept of elasticity of demand and discuss the factors that determine elasticity of demand. Distinguish between price elasticity, income elasticity and cross elasticity of demand and evaluate on their importance especially to businessmen.
Elasticity of demand
The reaction of demand for a service or good in order to decrease or increase in the price. Usually, when the price drops dramatically, the sale will increase and vice versa. As a general rule, appliances, cars, confectionary and other non-essentials show elasticity of demand while most necessities (food, medicine, basic clothing) show inelasticity of demand (do not sell importantly more or less with changes in price).
Companies are very interested to know about the reaction of demand but not only to change the price, they also need to know the reaction of demand to change in other determinants like the prices of replacement or complementary goods and customer's income. They will interested to know about the income elasticity of demand - the reactivates of demand in any changes in consumer's incomes; also the cross-price elasticity of demand- the reactivates of demand for their goods to a change in the price of another (whether a complement or replacement).
Price Elasticity of Demand
Price elasticity of demand is explained as the measure of responsiveness in the quantity demanded for a product because of changing in price of the same good. It is a kind of determinant of how consumers response to a change in price. In the other hand, it is a kind of percentages changing in quantity demanded by the percentages change in price of the same product. In the study of economic and business, the price elasticity of demand is rather a computing of the sensitivity of quantity demanded to changes in price. It computes the relationship as the ratio of changes percentage between quantities demanded a commodity and changes in its price.
In the other words, when we can say that the demand for the good is very inelastic if the consumers can and will pay almost any range of prices for the commodity, and very elastic if consumers just can only pay a certain price or a limited range of prices for the products. Inelastic demand means the a producer increase prices without any damages in demand for its goods, and elastic demand means consumers are price sensitivity when the good is sold and they could not afford it again if the price will increase.
As an good example of a commodity, which has inelastic features is drinking water that people will definitely pay anything for that (whether high or low with relative equivalent demanded).
In the other word, some products like sugar has elastic feature because of switching the consumers, as a result of increasing in price, to the substitutions.
In order to compute the coefficients of price elasticity, the below formula is used for a given product just as follow:
Ed = 0
Completely inelastic demand: by changing the price, quantity will not change. i.e., food and housing.
Ed < 1
Inelastic demand: Not very responsive to change in price .i.e., electricity, cigarettes.
Ed = 1
Unit (or unitary) elastic demand: The percentage change in quantity demanded is equal to the percentage change in price. i.e., gasoline, recreation.
Ed > 1
Elastic demand: Any percentages of changing in price, exactly affect to the percentages in quantity demand. Meaning that consumers are price sensitive. i.e., air travel, movies, and restaurant meals.
Ed = âˆž
Completely elastic demand: Quantity demanded is completely affected in changing in price. A very small increasing in price will affect to disappear the demand. i.e., soft drink from two campus machines located side by side.
Perfectly Elastic Demand Curve Perfectly Inelastic Demand Curve
Falling in price normally affect in the quantity demanded by consumers. When the changing in quantity demanded is less than changing in price, so the demand for a product is inelastic. While there is no replacement product for the exist one, so the goods and services are inelastic. As an good example, demand for antibiotic will be definitely inelastic when it alone can destroy an specific infection. In this situation, the patient will pay whatever is needed to purchase the enough amount of drug in order to kill the infection.
Applications of Price Elasticity of Demand
The price elasticity of demand can be applied in a wide variety of problems when someone needs to know the expected change in quantity demanded or revenue given a considered changing in price.
As an example, a state automobile registration authority considers a price hike in personalized "vanity" license plates. The current price is $40 per year and the registration office in thinking about the increasing price to $45 per year in order to increase the revenue. It is suppose that the registration office knows that the price elasticity of demand from $40 to $45 is 1.3.
The elasticity is greater that one in the rage of the price, so it is known that an increasing in price would decrease the revenue, which is collected by the automobile registration authority, therefore the hike's price would be unwise.
Factors Influencing the Price Elasticity of Demand
The price elasticity of demand for a special demand curve is affected by the following factors:
Availability of substitutes: the greater the elasticity is because of the greater number of replacement of products.
Degree of necessity or luxury: magnificence products tend to have greater elasticity than requirements. Some of the products at first do not have a higher degree of requirement and they are habit forming and can become "necessities" to some consumers.
Proportion of income required by the item: commodities need a larger portion of the consumer's income, which is lead to have a greater elasticity.
Time period considered: over the long run, elasticity tends to be greater because consumers can adjust their buying behaviour in changing the price, when they have more time.
Permanent or temporary price change: different kind of responses could be appeared in just one-day sale, than a permanent price decrease in the same scale.
Price points: decreasing the price from $5.00 to $4.99 may result in greater increase in quantity demanded than decreasing it from $5.99 to $5.98.
Income elasticity of demand (YÐ„D)
How sensitive is the demand for a product to a change in the real incomes of consumers? In order to compute it, we use elasticity of demand. Since the value of income elasticity tell something about the nature of a product and how it is perceived by consumers, so the result is very significant. It also influences the amount of changes in economic growth level and pattern of demand for goods and services.
Income elasticity of demand measures the reaction of the good's demand in changing the people's income for demanding goods and services. It is computed as the percentage of the changes rage in demand to the changes range in income. As an good example, if, in response to a 10% increase in income, the demand of a good increased by 20%, the income elasticity of demand would be 20%/10% = 2.
Bellow is the formula of computing the coefficient income elasticity of demand:
The most important determinant of income elasticity of demand is the rage of good requirements; also, another determinant is the level of consumer's income.
As we can see in the developed country, the percentages of demand for luxury products is developed very quickly because of increasing the people's income, while the demand for basic and primary products like bread increase just a little bit. Consequently, things like cars and abroad holiday have a very high elasticity of demand, while something like potatoes and bus journeys have a low elasticity of demand.
When income increase, some of goods will be decreased. When people have high income and earn more, so the switch from cheep margarine to the better quality of that or butter. Some different usual products and goods have a positive elasticity of demand, whereas cheaper goods have a negative income elasticity of demand (as mentioned earlier, any increasing in income lead to decreasing in demand).
A negative income elasticity of demand is related with inferior goods; any increasing in income will lead to a descend in the demand and may lead to switch to more luxurious replacements.
Inferior good's demand falls as consumer income increases.
A positive income elasticity of demand is related to normal goods, and a rises in income will lead to increase in demand. It is the necessity good, if income elasticity of demand for a good is less than 1. In the other hand, if the elasticity of demand is greater than 1, so it is a superior or luxury product.
While the income is not related to a change in the demand of a good, so a zero income elasticity or inelasticity demand appears. These would be sticky goods.
Share of budget
(% of household income)
Price elasticity of demand
Income elasticity of demand
Source: DEFRA www.defra.gov.uk
For most types of goods, the income elasticity of demand is low- infrequently negative (e.g. margarine) and equally the own price elasticity of demand for of foodstuffs is inelastic as well. In the other hand, the demand for these kinds of products among consumers is not a big matter and they are not price sensitive.
When the income of the whole countries rises, the demand for import will respectively change also. For determining how responsive the demand for goods is, in order to change in total income, the perception of income elasticity of demand can be used. The demand for many main goods has an income elasticity of demand coefficient of less than one. As incomes increase the demand for many of the goods such as coffee will increase (while demand for some may even decrease) but by a proportionately smaller quantity. If your allowance increases by 50% it is unlikely that you are going to increase your consumption of coffee by the same percentage! Sales will be slowly growing and sluggish.
Cross elasticity of demand
The cross elasticity of demand and cross price elasticity of demand calculates the responsiveness of the demand of a good to a change in the price of another good. By replacing two goods with each other, we should expect to see that consumers are likely to acquire more of one good while the price of this replacement increases. In the same way, when two goods are complementary with each other, we should expect to see that a price rise in one of them is just because of the demanding for these two goods to fall.
Changing in the percentage of demand for the first good, which arise in response to percentage change in the second good's price, could be calculated. For instance, if, in response to a 10% increase in the price of fuel, the demand of new cars that are fuel inefficient decreased by 20%, the cross elasticity of demand would be âˆ’20% / 10% = âˆ’2.
Here is the formulas in order to calculate the coefficient cross elasticity of demand:
Two goods that complement each other show a negative cross elasticity of demand: as the price of good Y rises, the demand for good X falls.
Form the above example, these two goods, cars and fuel, are each other complementary; which is, one of them is used with another one. In this case the cross elasticity of demand will be negative, as increasing the price of fuel, so the demand would be decreased. In the case of perfect complements, the cross elasticity of demand is negative perpetuity.
The cross elasticity of demand will be positive, when the goods are substitutes, therefore while the price of one of them goes up then demand of the other one will increase. For illustration, in response to an increase in the price of carbonated soft drinks, the demand for non-carbonated soft drinks will rise. In the case of perfect substitutes, the cross elasticity of demand is equal to perpetuity.
The cross elasticity of demand will be equal to zero, when the two goods are independent; as the price of one of them change, there will not be any changes in demand for the other goods.
The most important determinant of cross elasticity of demand is the nearness of the complement or substitute. The bigger one will have effect on the first good of changing in price in substitute or complement, and therefore the greater one will be the cross elasticity (positive or negative). Another determinant is time period, elasticity tend to be greater over the long run.
Companies hope to understand the cross elasticity for their good when considering the influence on the demand for their product of a change in the price of a competitor's good (complementary or substitute's goods).
Q5. Would it be desirable to have zero unemployment? What would be the benefits and costs of increasing the rate of unemployment? What policies would you advocate to reduce unemployment?
Having zero unemployment and the benefits
Cyclical Unemployment is explained as taking place "when the unemployment rate moves in the opposite direction as the GDP growth rate. So when GDP growth is small (or negative) unemployment is high." When the economy goes into recession and workers are fired, we have cyclical unemployment
Frictional Unemployment: The Economics Glossary explains frictional unemployment as "unemployment that comes from people moving between jobs, careers, and locations." If a person gives ups his work as an economics researcher to attempt and find a work in the music industry, we would consider this frictional unemployment.
Structural Unemployment: The glossary explains structural unemployment as "unemployment that comes from there being an absence of demand for the workers that are available". Structural unemployment is frequently due to technological change. If by introduction of DVD players, the sale of VCRs fall, so many people who produce VCRs will be out of work.
By looking at these three types of unemployment, we can understand that why it is good to have some unemployment.
Most of the people quarrel that while cyclical unemployment is the by-product of a weak economy, it is unavoidably a bad thing, although some have disputed that recessions are good for the economy. The latter is not a position I hold, so I am willing to accept that usually speaking, a zero level of cyclical unemployment is likely to be useful.
What about frictional unemployment? Now refer to that person who gives up his job as an economic research to follow his dreams in the music industry. He quit his job that did not like to try a career at the music industry, even though it caused him to be unemployed for a short while. Alternatively, consider the case of a person who is tired of living in Flint and decides to make it big in Hollywood and who arrives in Tinsel town without a work. A great deal of frictional unemployment comes from people pursuing their dreams. This is definitely a positive kind of unemployment, although we would hope for these individuals' benefits, which they do not continue unemployed for too long.
In conclusion, structural unemployment. When the car became ordinary, it cost many buggy producers their jobs. At the same time, most would dispute that the automobile, on net, was a positive expansion. The only we could ever remove all structural unemployment is by removing all technological development.
The cost of increasing unemployment rate
By breaking these three kinds of unemployment into cyclical unemployment, frictional unemployment, and structural unemployment, we see that an unemployment rate of 0% is not a positive thing. The only positive rate of unemployment is the price we pay for technological development and for people pursuing their dreams.
The social costs of unemployment to people as individuals, to their families, and to the community as a whole, are as follows:
Poverty, lack of spending money
Young people without full-time work experience
Reduced life span
Increasing suicide rate
Drug abuse, crime
Increased family breakup
Higher and rising crime rates
Brutalization of lifestyle
(1) Loss of income tax from those now unemployed.
(2) Loss of National Insurance contributions, which would have been received from both employees and employers.
(3) Loss of Value Added Tax as the unemployed reduce their spending.
(4) Increased cost of Unemployment Benefit (Among developed countries, the British rate of benefit appears to be one of the lowest).
(5) Increased cost of Social Security support payments.
(6) Increased costs for Health Service, Police and Prisons.
Note that perseverant lack of consideration and care and towards its members leads to a view of society as being hostile and unrewarding. We now see this happening and see its effects.
To the society, the social cost of unemployment is the whole cost to the society and the total of the items are listed here.
Prices used to be based on the method of 'cost plus reasonable mark-up', and unhindered competition was meant to ensure that the mark-up was reasonable. Prices are now based on what people can be chased to pay for what they can purchase. The mark-up can be massive, when producing in a low wage country and then selling in a high wage country.
Manfred Davidmann pointed this out in 1996, also saying that imports are priced in the amount of what market will bear, or only under. The huge profit margins then cause that production move from high-wage to low-wage countries. The result is a lowering of standard of living in high-wage countries to that in low-wage countries, instead of an increasing of standard of living in low-wage countries to that in high wage countries.
The huge additional profits, which consequence from transferring operations abroad then do not effect from doing a better job, or from providing better, or more desirable, or more efficiently produced, goods or services.
It is an accepted standard of economics, which the social costs of an enterprise's operations have to be paid by the enterprise, expressed by the maxim 'The polluter pays'. In the other hand, the social costs of unemployment have to be paid by the enterprise, which caused the unemployment.
To the extent to which an enterprise fails to allow for, and pay, the social costs of its operations, to that extent are its profits derived from passing its operating costs to the society, is it making profits at the cost of the society, is it developing the society and its members.
The unemployment people and some of that paid by the community; nonetheless, pay the social costs of unemployment.
In this way, the owner and directors make profit from the unemployment and the home country is the cause of the lower standard of living .in continues, they will continue to make profit from increasing unemployment and its results is as long as they are not forced to pay the social cost. In short, until they have permission to pass this part of their operating costs to the community.
Policies to reduce unemployment
In the long period, effectual policies to reduce the total level of unemployment need to encourage.
An improvement in the employability of the labor supply - thus the unemployment people have the right skills to pick up the accessible job opportunities. Policies should concentrate on developing the occupational mobility of labor.
An improvement in the incentives for people to search and then accept paid work - this may need some improvements of the tax and benefits system.
A sustained period of economic growth so that new jobs are being created - this needs that total demand is adequately high for businesses to be looking to develop their workforces.
Improving skills and reducing occupational immobility- Policies should supply the unemployed with the skills they require to find re-employment and progress in the incentives to find job. The consequences of workers being occupationally immobile, is structural unemployment-developments in education and training will raise the human capital of these workers, and hence give them a better chance of taking the new jobs that become accessible in the economy.
Reflecting Aggregate Demand- The government can also use macro-economic policies to increase the level of total demand. These policies might involve lower interest rates or lower direct taxes. It might also encourage foreign investment into the economy from foreign multinational firms. In the diagram below, we see an increase in aggregate demand leading to growth of aggregate supply. Because of the increasing in demand for output, the demand for labor at each wage rate will grow - leading to an increase in total employment.
No kind of increasing in demand and production has to meet by using more labor. Each year we expect to see an increase in labor productivity (more output per worker employed) and, businesses may decide to raise production by making superior use of capital inputs (machinery and technology).
Benefit and Tax Reforms - falling in the real value of unemployment benefits might raise the incentive to take a job - predominantly if the actual worth of unemployment benefits is well below the national minimum wage rate. Targeted measures are designed to help the long-term unemployed find re-employment (including the Government's "Welfare to Work Schemes")
Employment Subsidies - Government subsidies for those companies, which take on the long-term unemployed, will make an incentive for companies to raise the size of their workforce.
Economic Growth and Unemployment - A growing economy makes jobs for people entering the labor market for the first time. Moreover, it provides for unemployed people, who are looking for the job, the opportunity for employment .
I do not agree that we can just have less unemployment if we are eager to accept higher inflation, because when inflation rises, prices raise, so demand decreases. Consumers have some problems to survive because of the high price, so obviously workers ask for a pay raise, companies cannot afford to do, subsequently they outsource. They move to a country, which has a low minimum wage such as China or India. Logically, Unemployment increases when Inflation does.
Q8. What are the constraints normally countries face in achieving a sustainable economic growth. What are the merits and demerits of attempting to achieve a faster growth rate in this country?
At first, the meaning of Economic Growth Rate and how it can be formulate and calculate should be explained. In second part we will discussed about what is Malaysia's ranking among of the other country in Economic Growth Rate. How we can increase this rate and what is advantages and disadvantages of increasing economic growth rate in this country.
Economic growth is an increase in activity in an economy. It is often computed as the rate of change of gross domestic product (GDP). Economic growth refers only to the quantity of goods and services produced; it does not say anything about the way of producing. Economic development, an associated term, refers to change the way of producing goods and services; positive economic development involves the introduction of more efficient or "productive" technologies or forms of social organization. Economic growth can be both positive and negative. Negative growth is referred to say that the economy is shrinking. Negative growth is related to economic recession and economic depression.
In order to compute the economic growth rate, we have to measure from one period to another in percentage terms. This measure does not regulate for inflation; it is shown in nominal terms. It is a kind of measuring of the changes rate, which a nation's gross domestic product goes through from one year to another. If a nation's economy is greatly dependant on foreign earning, gross national product can also be used.
The economic growth rate provides insight into the general direction and scale of growth for the whole economy.
For Malaysia as a developing country or under development, in my belief, it is better to use a real sample for better realization. As DATO' SRI MOHD NAJIB said:"One lesson is the realization that for China, like Malaysia, an open door economic policy has brought extraordinary economic progress. For the past 20 years or so, China had enjoyed an annual average growth rate of more than 9.5 %. Given her size, this is indeed a remarkable achievement unequalled in human history. During that period, more than 400 million people had been lifted out of poverty. Bicycles, once ubiquitous on China's roads and streets, are fast disappearing, being replaced by local and foreign automobiles on wide boulevards and modern highways."
Economic Growth Rate is a kind of factor for each country in order to show the improvement its economy and it is depends on some items for making a decision and ranking. First, we need to know that which factors have the most affection on Economy Growth Rate and how it can be improved, and then we can concentrate on Malaysia in order to make it more powerful in economic growth rate. According to what has been reported by authorities, the most significant part of growth rate is gross domestic product (GDP).
After world recession the rates of growth were changed from last years the same as Malaysia (graphs bellow). Malaysia has been feeling the result of global economic decline, principally in the last quarter of 2008. Exports and investment had focused during the time that consequently caused real GDP growth to decelerate sharply to a marginal 0.1%.In the face of increasing global economic complexities, the Government had reported the second Stimulus package of RM60 billion in March 2009 in order to prevent the domestic economy from reducing and fall into a deep recession. Over 2009 and 2010, the package implemented that also help employment, private division investment and consumption as well as providing social safety net. In November 2008, the Government had announced the first stimulus package amounting to RM7.0 billion. The fiscal stimulus packages are to compliment expansionary monetary policy to help support domestic spending and overall economic growth. The Government recently revised downward the country's GDP predict for 2009 to between minus 5.0% and minus 4.0% from its earlier projection of minus 1.0% to 1.0%. The revision was made after first quarter 2009 GDP shrank a worse than expected 6.2%. This is the first decline since third quarter of 2001 (-0.4%). Whole the world was found a bad circumstances in recession and inflation, and this data demonstrated the responsibilities of Malaysia government for prevent its country in against of inflation and its affection on life's quality.
In short, The Malaysian economy recorded a moderation in 2008 affected by the sharp deterioration in global economy as the US sub-prime mortgage problems evolved into a full-blown global financial crisis. The deterioration in external demand had adversely affected the country's export and investment performance, while slowing down spending on consumption.
As an open economy, Malaysia is experiencing the stronger impact of global economic crisis this year and the country's real GDP could also slip into recession after posting a moderate 4.6% growth last year. A number of monetary and fiscal policy measures have also been announced by the Government to help support the economy. While the fiscal stimulus involves high budgetary cost to the Government, and the fiscal deficit will significantly expand, the expansionary policy responses are necessary to help prevent the economy from sliding into a deeper downturn. However, the positive effects of these policy measures can only be achieved following their quick and effective implementation.
Economic growth take places whenever people take resources and reorganize them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix low-cost ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. We learn from human history that, however, economic growth springs from better recipes, not just from more cooking. New recipes usually produce less unpleasant side effects and produce more economic value per unit of raw material.
Every generation has perceived the limits to growth that limited resources and undesirable side effects would pose if no new recipes or ideas were discovered. Moreover, every generation has underestimated the potential for finding new recipes and ideas. We constantly fail to grasp how many ideas remain to be discovered. The difficulty is the same one we have with compounding: possibilities do not merely add up.
In 1997, Malaysia suffered from a harsh blow by the Southeast Asian financial crisis, the exchange rate of Malaysian currency ringgit against the U.S. dollar has decreased 46%, the composite index of stock market fell more than half. In 1998, Malaysia's economy first, started the negative growth (-7.5%) since last 13 years, after that unemployment and inflation rates increased. In September 1998, Malaysian Government adopted the expansionary monetary policy, then the introduction of selective capital and currency control calculates came out. The major content concentrated on the regulation of short-term foreign investment, the Ringgit Malaysia against the U.S. dollar exchange rate will be fixed at the level of 1:3.8, and then government announced the prohibition of offshore ringgit transactions. After that, Malaysia financial situation was being stabilized, the stock market had also been gradually recovered, and an annual economic average growth rate has remained above 8% since that year.
In recent years, Malaysian saw the stable exchange rate of currency, restructuring of bank corporate debt, expanding demand of domestic and new export policies, the economy of Malaysia has maintained a rapid growth. Government had stressed some important implementations to fiscal deficit, for example, the abolition of a number of costly image projects, especially focusing on the construction and other basic industries such as agriculture. Government recommends the consuming and investing behaviours, so now the private sectors are as the country's new economic growth pillars. At the same time, government encourages the development of tourism, education and achieves economic diversification.
To increase the economic growth rate, first, must minimize the costs and absorb more investment. Now we can see there are many countries are competing with each other, they fight just because they want more investment, but this behavior may lower the standard, as well as reducing the variety of requirements. So, all of these are losses to us. Malaysia can do something to avoid this situation. For example, help Malaysian tourism to be revitalized. In addition, Malaysia government also does not want to lower the standards. Otherwise, they must further maintain a high standards and own brand. Malaysia government needs to have some of their own methods and measures, not just to say that they refuse all the recommendations from west, but in fact, they just need to achieve a balance. We may feel that the west measures depend on the transparency and accountability. However, the fact in Asian countries, this has been a weakness, they always say that there would be many stimulus packages, and the unnoticed part is not fully utilized or the part of measures we want from west for focusing on the accountability, which was mentioned above, while strengthening auditing the standards. By this way, Malaysia government can help the people, not by a number of external affairs of the harm and impact, these things are already not aware by them, and no longer their responsibility.
If Malaysia attempts to achieve a faster economic growth rate according to the current global situation, I think, compare with the advantages obtained already, Malaysia citizens will burden more disadvantages once government makes this decision. For example, unemployment and economic growth are negative correlation, that is, economic growth rate rises, unemployment rate declines; on the contrary, economic growth rate declines, unemployment rate rises. On the other hand, inflation and economic growth is related so closely, it means that the high economic growth rate has generally been accompanied by a high rate of inflation. First, the rapid economic growth, will further stimulate the growth of investment, but also increase a substantial demand in aggregate, thus contributing to a increase in prices which leads to the inflation; if Malaysia government lower the speed too fast, although the prices may be stabilized for a while, but also will bring problems-----supplies are reduced, and many companies will be in cut-off, semi cut-off state, even some workers will lose their livelihood security which also causes the social instability(this is already happened on Malaysia export industries a few years ago). Nevertheless, if the economy is growing too fast, obviously exceeded the scope of resources, which will cause a serious inflation. About the rising prices, especially the sharp rise in prices will affect the economy continues to grow rapidly. Because prices rise sharply is so harmful, the state will adopt austerity measures to curb inflation. The contraction speed will lead a sharp declining in economic growth rate or even sustaining a slow economic growth rate.
Therefore, during the economic restructuring process of Malaysia, although her economy runs its own complexity and uncertainty, the relevant departments in government must implement the tasks, which are assigned by the citizens to maintain the economic stability of Malaysia.
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