The article titled “ Spectre of rising prices ” was posted on 7 March 2011 by The Star Online. It reports the impact of rise in universe oil monetary values and explains how this affects the state.
With the universe oil monetary values increasing quickly, the populace is concerned about the effects to the economic system of Malaysia in 2011. Harmonizing to early experiences, the quickly increasing monetary values of oil and gas normally affect the state ‘s economic system growing.
The purpose of this study is to analyze the impact of the rise of universe oil monetary value in Malaysia utilizing economic sciences constructs and simple diagrams. The study will stress on macroeconomics, including subjects such as rising prices, concern rhythm, aggregative demand and supply, pecuniary policy and financial policy. At the terminal of the study, a sum-up of all the treatments mentioned will be concluded.
3.1 Business Cycle
The systematically oil monetary value alterations has a great impact on the concern rhythm. The emerging addition in the universe oil monetary value delays the recovery of economic system in Malaysia. The consequence of the concern rhythm on oil monetary value alterations is illustrated utilizing motions in existent GDP. Generally, each concern rhythm has two stages: A contraction and enlargement and two turning points: A extremum and a trough. Figure 1.1 shows a conjectural concern rhythm.
Harmonizing to Mahbob ( 2011 ) , the flourishing monetary value of oil and gas is non positive for the economic growing as Malaysia is merely seeking to retrieve after the planetary fiscal crisis in 2009. This will take to recession. Recession normally decreases the rising prices rate. This is an exclusion because the recession is caused by a supply daze. During this period of clip, the rising prices rate of Malaysia rises quickly. Finally, this increases the unemployment rate and causes the existent GDP to fell significantly.
3.2 Aggregate demand
In the article, it was mentioned that the populace have to set up their disbursement and form of ingestion due to rising prices. The populace are encouraged to increase domestic nutrient production, economized on travels and increase use of public conveyances to advance family nest eggs ( Mahbob 2011 ) . This will assist Malaysia to chasten the inflationary emphasis.
Aggregate demand ( AD ) curve shows the relationship between the monetary value degree and the measure of existent GDP demanded, ceteris paribus. The aggregative demand curve is ever downward sloping. This is due to a lessening in the monetary value degree increases the measure of existent GDP demanded.
Meanwhile, the short-term sum supply curve ( SRAS ) shows the relationship in the short-run between the monetary value degree and the measure of existent GDP supplied by the house.
The aggregative demand curve besides shows the equilibrium degree of existent GDP. The entire disbursement is tantamount to the entire end product for each monetary value degree. The equation of aggregative demand is shown in Figure1.2 as below:
The aggregative demand curve will switch if any variable alterations other than monetary value degree. A alteration in C, I, G or net Ten will switch the aggregative demand curve. For illustration, the addition in monetary value of oil causes the families and houses to go pessimistic about their hereafter incomes. They are more likely to salvage. This will diminish the overall ingestion and hence, switching the aggregative demand curve to the left.
To assist to ease the inflationary force per unit area in Malaysia caused by the continuously increasing oil monetary value, C, I, G or net Ten should be increased. The aggregative demand curve will switch to the right from AD1 to AD2 in Figure 1.3 if C, I, G or net Ten are increased.
3.3 Aggregate supply
The aggregative supply ( AS ) curve shows the consequence of alterations in entire end product or existent GDP on the monetary value degree.
The long-term sum supply ( LRAS ) curve is when the existent GDP peers to possible GDP and there is full employment. The long-term sum supply curve is ever perpendicular because possible GDP is non affected by the monetary value degree.
An unexpected alteration in the monetary value of natural resources such as oil will switch the aggregative supply curve. For case, a sudden addition in the monetary value of oil in Malaysia causes supply daze to go on. The monetary value degrees of the outputs addition significantly as a greater sum of inputs are needed for production. Costss of bring forthing end product rise. This cause the aggregative supply curve to switch to the left, from AS1 to AS2, as shown in Figure 1.4.
Inflation is by and large defined as “ a procedure of continuously lifting monetary values, or equivalently, of continuously falling value of money ” ( Laidler and Parkin, 1975, 741 ) .
Inflation rate is the per centum rise in the degree of monetary value every twelvemonth.
The monetary value of Ron97 gasoline was increased to RM2.70 per liter at 1 April 2011, which is RM 0.20 higher than the monetary value earlier. In 2011, current high oil monetary values are really caused by the frights that supply would be disrupted by the agitation and convulsion in Libya and Egypt and the protests in the Middle East. The relentless addition in the monetary value of oil in Malaysia contributed to rising prices.
Malaysia, who is sing high rising prices rate, will do the existent income of single to diminish. This will so diminish the buying power of consumer and weakens Malayan currency. In long term, Malaysia will see a diminution in economic growing.
Harmonizing to the economic sciences theories, the addition in monetary values of oil is a cost-push rising prices. Cost-push rising prices is defined as “ the rising prices that arises as a consequence of a negative supply shock-that is, anything that causes a lessening in the aggregative supply of goods and services ” ( Essential of Economics, 2010, 465 ) . The surging oil monetary value causes a negative supply daze, which leads to an upward displacement in monetary value degree and lower existent gross domestic merchandise ( GDP ) in the short tally.
An addition in oil monetary value causes an addition in the production costs. This shifts the aggregative supply curve to the left, from SRAS1 to SRAS2 in Figure 1.5. This moves the short-term equilibrium from point A to point B. The existent GDP falls below its possible degree and the monetary value degree addition from P1 to P2.
3.5 Monetary Policy
The lifting oil monetary values contributes to a large portion of the addition in rising prices rate in Malaysia. In Malaysia, pecuniary policy is determined by Bank Negara Malaysia. The purpose of pecuniary policy in Malaysia is to achieve monetary value stableness of the currency. By keeping low rising prices, it helps to advance long-run growing and full employment. Bank Negara Malaysia implements unfastened market operations ( OMO ) to sterilise liquidness alterations in the nightlong money market to keep changeless hard currency rate.
As shown above in subdivision 3.2, AD = C + I + G + X-M. An addition or lessening in the involvement rate will impact the ingestion ( C ) , investings ( I ) and net exports ( X-M ) . However, it does non act upon authorities purchase. For illustration, an addition in the hard currency supply on the OMO will take to a autumn in involvement rate and an addition in consumer and investing outgo.
During rising prices, Bank Negara Malaysia implements contractionary pecuniary policy to maintain the rate of rising prices low. Bank Negara Malaysia increases the hard currency rate at inflationary periods to diminish the hard currency supply. As a consequence, involvement rate is addition. This will so diminish the investing, ingestion and net exports. The aggregative demand curve displacements to the left. Price degree and existent GDP are decreased.
As shown in Figure 1.6, Bank Negara Malaysia prevents the aggregative demand to increase excessively rapid by raising the involvement rates. The contractionary pecuniary policy shifts the aggregative demand curve from AD0 to AD1. The monetary value degree decreases from P0 to P1 while the existent GDP lessenings from GDP0 to GDP1. This helps to cut down rising prices.