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Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
1
AVID COLLEGE Assignment Cover Sheet
Student Details
Student Name: Ibrahim Saheshan Ali Student ID: ac3620
Contact Number: 7791193 Email Address: jubraan@hotmail.com
Scheduled Unit Details
Unit Title : Economic Analysis for Business Word Count: 4408
Unit Enrolment Details : Year (yyyy) 2015 Semester (S)
Lecturer : Fathimath Saeed
Assessment Details
Assignment Name: Effects of Plunging oil prices
Due Date : 10th December 2015 Date Submitted: 8th December 2015
Extension Granted?
No
Yes – Lecturer’s Extension Date:
Yes – Department Extension Date:
Is this a resubmission?
No
Yes Resubmission Date :
Declaration
I Ibrahim Saheshan Ali here by certify this assignment is my / our own work based on my / our personal study and / or research I/ we have acknowledge all material and source used in the preparation of this assignment. I/ we also certify that the assignment has not been submitted for assessment in any other subject or at any other time in the same subject and that I/we have not copied in part or whole or otherwise plagiarized the work student and / or other person
Name: Ibrahim Saheshan Ali Signature: Date: 8th December 2015
For Office Use Only :
Receipt date: Received By: Signature:
*Note: Late submission without any approved extension; MVR1000 AND 10% Deduction from total marks Late submission with prior extension; MVR500 with 5% Deduction from total marks
Keep this with Students
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Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
2
ECONOMIC ANALYSIS FOR BUSINESS
EFFECTS OF PLUNGING OIL PRICES
Ibrahim Saheshan Ali
MBA (Strategic Management) Avid College
10th December 2015
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
3
Table of Contents
1. Abbreviations 4
2. Abstract 5
3. Introduction 6
4. The effect on prices of automobile in US market as a result of plunging oil prices 7
a. Oil demand and supply 7
b. Oil production & prices 9
c. US automobile industry 10
d. Effects on the prices of automobile 11
5. The impacts of oil prices on the Malaysian economy 13
a. Malaysian oil industry 13
6. Effects of depreciating Ringgit value & inflation on Malaysian economy 17
a. Demand pull inflation 18
b. Malaysia’s inflation rates 18
c. Cost push inflation 19
7. Negative effects of plungging oil prices & Ringgit value & inflation on Malaysian economy 20
a. Expansionary monetary policy 22
b. Contractionary monetary policy 23
c. Expansionary fiscal policy 23
d. Contractionary fiscal policy 24
e. Macroeconomic policy mix 24
8. Externalities of provision of eductaion, tourism and healthcare in Malaysia 26
a. Positive externalities of education 27
b. Positive externalities of tourism 27
c. Positive externalities of health care 27
9. Conclusion 29
10. References and sources 30
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
4
ABBREVIATIONS
The main abbreviations used in this report are as follows:
OPEC (Organization of petroleum exporting countries)
OECD (Organization for economic co-operation & development)
IEA (International energy agency)
MPC (Malaysia Productivity Corporation)
Mb/d (Million barrels per day)
Tb/d (Thousand barrels per day)
4Q14 (4th Quarter in 2014)
3Q15 (3rd Quarter in 2015)
NGL (Natural gas liquids)
FSU (Former Soviet Union)
PSC (Production Sharing Contract)
SMB (Social marginal benefit)
PMB (Private marginal benefit)
SMC (Social marginal cost)
PMC (Private marginal cost)
GDP (Gross domestic product)
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
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ABSTRACT
This is an economic analysis report entitled as “effects of plunging oil prices”. The main objective of this
report is to analyze the effects of plunging oil prices on the Malaysian economy and on the US automobile
production and demand. This is a systematic approach to determine the changes in global oil production,
demand and supply. The changes in the prices of oil in the global market and the effects of the plunging
prices on the Malaysian economy have been identified and analyzed through relevant online sources.
This analysis is done through online research on the world oil market, OPEC and Non-OPEC production,
demand and supply. The tool for this analysis is relevant official websites providing required official
information about the industry world-wide. Central bank’s statistics are considered in measuring the
depreciating value of the Malaysian Ringgit and its effects on the whole economy.
Charts and tables are incorporated for better understanding and ease of comparison.
The study and analysis states that the plunging oil prices are highly influential to Malaysian economy and the
total GDP. The depreciating Malaysian currency is affecting the economy adversely, and if not countered
efficiently can lead the economy into a recession.
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
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INTRODUCTION
This economic analysis is done on the effects of plunging oil prices on Malaysian economy and the US
automobile industry.
The total demand and supply for oil and oil growth in the year 2015 is studied along with the demand and
supply in the US through OECD, Non-OECD and OPEC production. The global oil production and prices
are studied and the effects on the US automobile industry are forecasted in this report along with the possible
effects on the prices of automobiles in the US market.
The impacts of oil prices on the Malaysian economy is discussed after studying the country’s oil production,
exports and imports, and other industrial activities that contributes to the economy.
The effects of depreciating currency value and the inflation in the economy is discussed along with the
factors that may cause the currency value to fall and the types of inflation and its chances to impend to a
recession.
After studying the types, level and reasons for the growing inflation in Malaysian economy, a
macroeconomic policy mix is suggested which can tackle the current economic issues in Malaysia.
Some of the economic activities carried out in the Malaysian economy that contributes to the GDP have been
highlighted in this report with the possible externalities resulting through their existence. The
recommendation for the government to subsidize on these activities is mentioned after identifying the
positive and negative externalities produced by these activities.
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
7
The effect on prices of automobiles in US market as a result of plunging oil
prices
Oil demand & Supply
OPEC (2015) states that Oil demand growth in
2015 was foreseen to rise by 1.50 mb/d. Total
oil demand is forecasted at 92.86 mb/d.
Non-OPEC oil supply growth in 2015 stands at
0.72 mb/d. In September, OPEC crude
production increased by 109 tb/d to 31.57
mb/d.
8788899091929394959697
1Q
20
13
2Q
20
13
3Q
20
13
4Q
20
13
1Q
20
14
2Q
20
14
3Q
20
14
4Q
20
14
1Q
20
15
2Q
20
15
3Q
20
15
4Q
20
15
1Q
20
16
2Q
20
16
3Q
20
16
4Q
20
16
mb
/d Total Oil DemandProjections for
2016
(Source: OPEC.org)
World Oil Demand by main region, y-o-y growth 2013 - 2014
(Source: OPEC.org)
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
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According to IEA (2015) the
average demand in 2015 is
higher than the supply except for
the FSU. This shortage can
occur due to the plunged oil
prices. Krauss’s (2015) article
states that the oil industry is in a
new downturn, due to the
plunging prices per barrel which
has been cut roughly in half
since June 2014, reaching levels during the depths of the 2009 recession.
0
5
10
15
20
25
Americas Europe Asia Oceania
Demand 24.5 13.8 8.1
Supply 19.6 3.4 0.5
MB
/D
Average Oil Demand & Supply
(OECD 2015)
4.8
0.7
11
12.5
6.9
8.2
4.1
13.9
0.1
4.33.6
4.6
1.2
2.3
0
2
4
6
8
10
12
14
16
FSU Europe China Other Asia Americas Middle East Africa
MB
/D
Average Oil Demand & Supply (Non-OECD) 2015
Demand Supply
(Source: IEA.org)
(Source: IEA.org)
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
9
Oil production & prices
IEA (2015) states that Global
production has dropped by 0.60
mb/d in august 2015. Crude oil
supply fell by 220 kb/d & Non-
OPEC production declined by
350 kb/d.
According to IEA (2015) The
plunge in global crude prices are
expected to cut non-OPEC oil
production by nearly 0.5 mb/d next
year, on a sharply weaker outlook for US supply, lower Russian output and structural declines in the North
Sea.
OPEC (2015) states that, the OPEC Reference Basket averaged $44.83/b in September, declining 63¢ from
the previous month. ICE Brent averaged $48.54/b, a gain of 33¢, and Nymex WTI averaged $45.47/b, up
$2.58. The Brent-WTI spread narrowed from $5.32/b to $3.07/b.
Asia Oceania
Europe
Americas
0
5
10
15
20
1Q15 2Q15 3Q15 4Q15
0.43 0.44 0.51 0.49
3.41 3.5 3.32 3.35
19.88 19.57 19.47 19.59
MB
/D
OECD Oil Production 2015
Asia Oceania Europe Americas
0
2
4
6
8
10
12
14
16
1Q15 2Q15 3Q15 4Q15
14.05 13.98 13.9 13.86
7.9 7.96 7.91 7.96
0.14 0.14 0.14 0.13
4.63 4.55 4.52 4.57
1.3 1.23 1.2 1.182.32 2.3 2.25 2.26
MB
/D
Non-OECD Oil Production 2015
Former USSR Asia Europe Americas Middle east Africa
(Source: IEA.org)
(Source: IEA.org)
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
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(Source: EIA.gov)
US Automobile industry
SELECTUSA (2015) states that USA has
one of the largest automotive markets in
the world and is home to 13 auto
manufacturers, which has produced an
average of over 8 million passenger
vehicles annually.
The declining crude prices may deeply
impact on automobile production since,
(Varjavand, 2015) article states that USA
spends nearly $1.5 trillion on crude oil,
more than 8% of its GDP every year.
Production of vehicles has increased since 2011 due to the fall in cost of factors of production thus increasing
the supply. The demand tends to increase due to lower prices of vehicles & lowering petroleum prices.
0
5
10
15
20
25
OECD Non-OECD
24.5
6.9
19.6
4.6
MB
/D
Average Oil Demand & Supply (USA)
2015
Demand Supply(Source: IEA.org)
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
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Effect on the prices of automobile
Changes in demand and supply can impact on the automobile prices in the US market. For example:
When the prices of petroleum
plunged, the disequilibrium took
place at P* & Q*, excess
demand forced a new
equilibrium at P1 & Q2
increasing the price.
0
2
4
6
8
10
12
2011 2012 2013 2014 2015
8.67
10.3811.1
11.7 12
Mill
ion
s
Year
Vehicle Production 2011 - 2015 (USA)
Number of vehicles
(Source: Statista.com)
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
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When the price was $120/
barrel the production
where 20000 automobiles.
At the price of $110/barrel,
production increased to
25000, thus resulted excess
supply.
The equilibrium took place
at P* & Q*. Due to the
plunge in prices of oil and
vehicles, the excess demand
increased the price, forcing a
new equilibrium at P1 & Q1.
At the same time the effect of
excess supply resulted prices
to drop and quantity
increased from Q1 to Q2.
Now the final equilibrium
forms at P* & Q2.
Hence, the final effect is that the prices will be questionable and the quantity supplied will increase.
Theoretically, when the demand and supply increases together the effect on the prices will be cancelled out.
But practically this will depend on the level of price plunge and the total demand.
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
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The impact of oil prices on the Malaysian economy
Malaysian Oil industry
According to MPC (2014) in the past, Malaysian oil and gas industry was dominated by foreign companies
like Shell & Esso and later the state-run energy group PETRONAS which came to existence with the
passing of Petroleum Development Act in 1974 took control over.
According to BBC’s (2015) article, Malaysia being South East Asia's third-largest economy, it is a major
exporter and producer of petroleum products.
(Source: tradingeconomics.com)
The plunging oil prices have affected Malaysia’s national income to decrease, but did not lose substantial
revenue as the country is not a major oil exporter. Kamari (2015) article states that Malaysia is more of an
importer of crude oil & petroleum.
0
100
200
300
400
500
600
700
587 586560 562 577
613
670 671 680 693 6976751
Kb
/d
Malaysia Crude oil production
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
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In 2014, Malaysia’s imports amounted to US$ 25.5
billion while exports were US$ 24.1 billion
(Kamari, 2015). This loss of national revenue due to
plunging oil prices is around US$ 330 million
which can be accommodated through reducing
governments operating costs such as fuel subsidies.
BBC (2015) article states that Malaysian Finance
minister Mr. Najib said, the revised budget assumed
that crude oil would trade at about US$ 55/barrel
and the prices are beyond their control.
Beside oil production, tourism and education has its shares on the Malaysia’s economy. Malaysia offers
Cultural, adventure, medical, beach and agricultural tourism to the globe and is promoted as “Malaysia, truly
Asia”.
Arrivals in millions & revenue in billions US$
(Source: corporate.tourism.gov)
25.5
24.1
23
23.5
24
24.5
25
25.5
26
Imports Exports
US$
Billion
Import & export of oil in 2014
Imports
Exports
24.58 24.71 25.03 25.72 27.44
56.5 58.3 60.665.44
72
2010 2011 2012 2013 2014
Tourist arrivals & revenue generated 2010 to 2014
Arrivals Revenue
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
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Since Malaysian economy does not solely depend on oil, the deficits can be neutralized by other sources of
revenue from other industries. Thus the plunging oil prices may not harm Malaysia’s whole economy.
(Source:idrisjala.my)
Malaysia is not a big player in oil trade compared to the oil rich Middle East. Malaysia produces 642700 b/d
and is on 28th in the world ranking while the top most Saudi Arabia produces 11,730,000 b/d and has a
reserve of more than 260 billion barrels (indexmundi.com).
The oil rich Arab nations have absolute advantage in oil production since resources are naturally inherited
and are easily accessible through land. Malaysia’s oil production largely depends on exploration in their deep
waters. Saudi Arabia specializes in oil production due to the easy accessibility and fairly attractive labor
market comprising of foreign workers with relatively low labor costs. Oil industry proves to be the
stronghold of Saudi Arabia’s economy and control on global market. Therefore investing in other fields such
as tourism, the opportunity costs for Saudi Arabia can be relatively high.
Other industries30%
Oil, Gas & Energy17%
Wholesale & Retail14%
Financial Services7%
Palm oil / Rubber7%
Agriculture6%
Tourism5%
Electric & Electronic5%
Business Services4%
Communication & infrastructure
3%
Healthcare 1% Education
1%
GDP Composition Malaysia
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
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Exploration and production of oil in Malaysia is carried out under Production Sharing Contracts (PSC)
whereby the companies are granted exploration rights by PETRONAS, obligating the contractor to provide
total financing and bear all the risks of exploration and development in exchange for a share of total
production and there are currently more than 70 PSC’s (MPC, 2014).
Malaysia specializing in oil production does not obligate the state to higher opportunity costs since the PSCs
cover the financing and risk bearing in oil production. Oil production does not hold the major share while
other industries contributes well to Malaysia’s GDP.
Hence, Malaysia has comparative advantage in specializing in the oil exploration and production without a
huge opportunity cost along with its other industries side by side to serve the total GDP.
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
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Effects of depreciating Ringgit value & inflation on Malaysian Economy
Vulcan post (2015) article states that Malaysia’s ringgit value has slid past 4.0 against US dollar in the worst
currency crash seen for the first time in 17 years. The main culprit however, is the decreasing oil prices
which destabilizes the oil-exporting economy.
Bank Negara Malaysia states that Ringgit exchange buying rate for US$ is 4.30 while the selling rate is 4.31.
Exchange rate Malaysian Ringgit to US$
There are several factors causing Ringgit to fall against the US dollar such as the higher demand for the
dollar itself and as well, the perception that Malaysia will be affected badly with the plunging oil prices
(Kamari, 2015) . The depreciating Ringgit exchange rate for US$ can have several effects on the economy.
Simply a depreciation means the currency can buy less foreign exchange, thus the imports become expensive
whereas the exports cheaper. This can result imported inflation as the prices of imported goods will rise. The
increase in expenses incurred to import goods will decrease the supply and eventually increase the prices of
imported goods whereas the falling Ringgit value against US dollars can increase the demand for Malaysia’s
exports. Cheaper exports can result increase in domestic aggregate demand.
(Source: Exchangerates.org.uk)
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
18
Higher domestic aggregate demand can cause higher economic growth since, imports and exports are a part
of aggregate demand. Falling currency value can result in lower imports and higher exports, increasing the
aggregate demand ultimately causing demand pull inflation.
Demand pull inflation
When a disequilibrium occurred at P* and Y* due to the
increase in aggregate demand a new equilibrium is
forced at P1 and Y1. This increases the prices from P*
to P1.
The quantity increased from Y* to Y1, thus to increase
supply, more expenses on imports have to be incurred
due to plunging currency value. Thus the prices will
increase and result in demand pull inflation.
The cost of domestic production may also rise due
to the rising cost of imported raw materials. This
can make the production more costly and result in
lower output which can result prices to rise,
eventually followed by cost push inflation.
Cost push inflation is a possible cause of
stagflation, in which the output will fall at the
same time prices will keep rising.
Chew (2015) article states that the introduction of
a 6% GST in April has also pressured on domestic
prices alongside the prices of imported goods.
3.17
1.66
2.11
3.14
2.7
0
0.5
1
1.5
2
2.5
3
3.5
2011 2012 2013 2014 2015
Malaysia's inflation rates
(Source: Statista.com)
%
AS
P 1
AD
Price
P *
AD 1
Y * Y 1 Quantity
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
19
Cost Push inflation
When a disequilibrium occurred at P* and Y* due to
the shortage of supply as a result of decreasing
output (due to the increasing cost of production) the
quantity supplied decreased from Y* to Y1 and the
prices increased from P* to P1 forming a new
equilibrium.
The quantity of output decreased while the price
increased resulting stagflation.
Thus in such a situation Malaysia is likely to experience both demand pull inflation and cost push inflation.
Since the value of Ringgit is expected to continue to fall, people trying to purchase more before the fall can
increase the demand thus worsen the inflation.
AD
AS
P *
P 1
Y * Y 1
Price
Quantity
AS 1
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
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Negative effects of plunging oil prices & Ringgit value on Malaysian
Economy
Malaysia being a price taker in oil industry, plunging oil prices can have its heavy deficits on Malaysia’s
economy. The falling prices can result in oil exports revenue to fall and central banks reserves to shrink.
Stratfor (2015) article states that Malaysia is the second largest energy producer in Southeast Asia and is the
country most threatened by the plunging oil prices. Due to the falling trend of oil prices, PETRONAS has
announced it would reduce its total payments to the government in 2015. Thus in such situations the
government has to decrease the planned spending.
Chandran (2015) article states that sharp currency depreciation and introduction of GST, are widely expected
to drag 2015 GDP growth below 5% from the estimated 5.8% in 2014.
The depreciating currency value can increase the aggregate demand thus increase inflation. The hard hit on
the prices of consumer goods and falling export revenue can worsen the economic situation unless it’s
countered with efficient state policies.
Inflation, if not handled properly can lead to a recession which can be very harmful to the entire economy.
Recession can be defined as a period of negative economic growth for two or more consecutive quarters.
When an economy experiences cost push inflation, there are chances of an impending recession. Since
Malaysia is likely to experience both demand pull & cost push inflation they may be leading to a recession.
The imported inflation and introduction of GST in Malaysia will rise the commodity prices. This will affect
the consumer’s disposable income. Thus the pressure on living standards can lead to lower growth and
aggregate demand.
In such situations to cut costs, firms and industries may also cut down investments which may further push
the economy into a recession. During recessions, economies often experiences rising of unemployment and
decrease in overall output.
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
21
(Source: Statista.com)
Nitisha (2015) states that since inflation is a complex situation, if it goes beyond a moderate rate it can
create disastrous situations for an economy, thus it should be controlled.
There are several measures to control inflation, such as monetary, fiscal measures or price controls that can
be implied by the state.
Monetary policy is one of the commonly implied measures to control inflation. In monetary measures
governments formulate policies to counter the economic issues by controlling money circulation in the
economy.
The fiscal measures comprises of government’s revenue and expenditures. To control inflation, in such
measures government formulates policies either to reduce spending or decrease state expenditures.
Implying price controls by the government can suppress inflation for a while, but doesn’t serve the purpose
for a longer term. Price controls itself cannot control inflation instead it can reduce the extent of inflation.
Thus in such circumstances the Malaysian government shall come up with a macroeconomic policy mix
which can tackle the economic issues from worsening and help to regain a healthy economy.
When formulating a policy mix, the government shall take into consideration the relation between the goods
and the money market. The interactions between these two markets are very straightforward. The interest
3.053.03
3.1
2.9
3
2.8
2.85
2.9
2.95
3
3.05
3.1
3.15
2011 2012 2013 2014 2015
Unemployment rate malaysia 2011-2015%
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
22
rates are always determined by the money market where the demand for money is affected by the income, the
goods market determines the income which depends on planned investments while the planned investments
are dependent on the interest rates.
There are two monetary and two fiscal policies which can be implemented to counter the inflation. They are:
a) Expansionary monetary policy
b) Contractionary monetary policy
c) Expansionary fiscal policy
d) Contractionary fiscal policy
These policies are very much related to the Aggregate expenditure of the economy. Aggregate Expenditure
can be calculated through the formula AE= C + I + G + (X-M).
C = consumption
I = investment
G = government spending
(X-M) = exports less imports.
Expansionary monetary policy
In this policy the government may either reduce
reserve ratio, lowers the discount rates or buy
bonds. This can result increase in money supply
in the circulation reducing interest rates,
increase investments & expenditure, increase
income and employment.
As per the graph when the money supply
increased from MS to MS1 the money demand
decreased where the interest rates fell from R* to
R1.
MD
R 1
R *
Interest
Rates
MS MD
MS 1 MS
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
23
Contractionary monetary policy
In this policy the government may sell bonds
and collect money to decrease money supply
in the circulation. This can result in higher
interest rates due to the reduction in money
circulating in the economy while the reserve
will increase.
As per the graph when the money supply
decreased from MS to MS1 the money demand
rises increasing the interest rates to R1 from
R*.
Expansionary fiscal policy
This policy is designed to stimulate the economy
during growth contractions. This policy can help
increase the aggregate demand since government
increases spending or decreases taxation.
As per the graph, when the government increased
its spending the aggregate expenditure increased
from AE to AE 1. The output increased from Y* to
Y1
MD
R *
R 1
Interest
Rates
MS MD
MS
MS 1
AE
Goods
market
Y
AE 1
Y 1 Y *
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
24
Contractionary fiscal policy
In this policy the government seeks to decrease the
aggregate expenditure and aggregate demand
through decreasing government spending or
increasing taxation. This helps reducing budget
deficits.
As per the graph, when the government decreased
spending the aggregate expenditure decreased
from AE to AE 1. The output decreased from Y* to
Y1
Implementing of fiscal policies, the initial effect takes place in the goods market whereas in monetary
policies it starts in money market.
Macroeconomic policy mix
In a situation where the oil prices are plunging and currency value depreciating at the same and increasing
inflation, government should take into consideration the production of oil and the circulation of money in the
economy.
To tackle the current economic situation in Malaysia, a combination of Expansionary fiscal policy with
Contractionary monetary policy can be suggested as an effective macroeconomic policy mix.
AE 1
Goods
market
Y
AE
Y * Y 1
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
25
The possible effects of expansionary fiscal and Contractionary monetary policy on the goods and the money
market
As per the graph when the government increased its spending or decreased the taxation, the aggregate
expenditure and the total output increased while the Contractionary monetary policy reduced the amount of
money circulating in the economy by decreasing the money supply which resulted in interest rates to rise.
The Expansionary fiscal policy accommodated with a Contractionary monetary policy can result the
currency value to appreciate. This is good for the depreciating Malaysian Ringgit. Yet at the same time it can
deteriorate the state current account.
The increase in aggregate expenditure can result greater budget deficits due to tax cuts or increased
government spending. The expansionary fiscal policy with Contractionary monetary policy can cause the
interest rates to rise. This rise can lead to capital inflows and currency value to appreciate.
The higher interest rates can increase the capital inflows as foreigners purchase domestic financial assets.
This can strengthen the capital account. As the foreign investments needs to exchange foreign currency for
the domestic currency, the increased demand for the Malaysian Ringgit in this case, will cause its exchange
rates to rise. Therefore the falling Ringgit value will appreciate.
The increasing aggregate expenditure and appreciating currency value can fight unemployment and increase
the total output. Thus can counter cost push inflation reducing the chances of a stagflation in the Malaysian
economy.
AE
Goods
market
Y
AE 1
Y 1 Y *
MD
R *
R 1
Interest
Rates
MS
MS MS 1
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
26
The appreciating domestic currency value will result exports to decrease making it less attractive to foreign
markets and imports will increase making it less expensive to the state’s consumers and local businesses.
In the implementation of such a policy mix, the government shall consider the balance-of-payment to keep
the current account from being totally deteriorated. Increase or decrease of either exports or imports
significantly can weaken the trade balance of the country, which may not be desirable for the economy. As
well the net effect of the combined policies, on the aggregate demand, GDP and the price levels highly
depends on the magnitude of the two effects caused by the Expansionary fiscal and Contractionary monetary
policy.
Externalities of provision of education, tourism and healthcare in Malaysia
According to Business dictionary (2015) externalities are a loss or gain in welfare of one party resulting from
an activity of another party, without there being any compensation for the losing party.
There are positive and negative externalities resulting from economic activities. A positive externality can
occur when production or consumption of a certain good or service causes benefits for a third party. For
example: education. A negative externality can be a harmful effect to a third party due to production or
consumption of a certain good or service. For example: burning of garbage in a dump yard causing air
pollution.
In almost every economic activity carried out, there can be positive and negative externalities resulting along
with the output.
Malaysia’s private sector provides education, tourism and health care facilities. These activities as
mentioned before, contribute 1%, 5% and 1% to the economy and GDP respectively.
When dealing with externalities governments can support positive externalities by providing subsidies,
quotas and etc which will ultimately increase the output and total well-being of the community as a whole
whereas to deal with the negative ones government can restrict by increasing taxation and reduction of
quotas and so.
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
27
Positive externalities of education
o More educated individuals usually are more productive
o Public schools providing mandatory education provides every child the chance to learn
o Public education helps redistribution
o More educated society means more civilized thus less crime and odd actions
Positive externalities of tourism
o Can preserve natural landscapes which can be otherwise used to industrial development
o Chances to experience unusual cultures which can be informative and profitable for the community
o Creates more employment and close the gap between cultures and religions
Positive externalities of health care
o An effective healthcare can lead to a positive economic gains through a healthy labor force
o Vaccination process helps the particular individual from getting infected from certain diseases while
it reduce the likelihood of other individuals contracting the disease
Beside these positive externalities there are negative externalities in these activities as well. For example:
offshore giant corporations operating in tourism market can funnel out revenues from local companies,
western fashion and trends can threaten the distinct lifestyles and local cultures. In health sector, great deal
of chemical waste can cause environmental degradations.
However a cost-benefit analysis advocates that the positive externalities of education, tourism and health
care turn out to be of more weight in production and consumption in the Malaysian economy.
For example: Higher education provision in Malaysia has numerous foreign candidates enrolled in their
universities which increases the inflow of foreign currency into the economy. Tourism and health facilities
on the other hand plays very well in foreign exchange inflows in relation to the consumption from foreigners.
Subsidizing economic activities can increase the total output and decrease the costs of production which can
result prices to fall. This can even increase employment since manufacturers may produce to their maximum
capacity due to the government support and assistance through subsidization.
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
28
For example:
Before subsidization
According to the graph there’s a
clear shift to the right of PMB
curve to the SMB as a result of a
positive externality. For example:
In education sector this can be
due to the more productive
individuals whereas in health
sector it can be due to more
healthier people thus a healthy
and reliable workforce. The
social marginal benefit as a
result of positive externality it has
a potential welfare gain, thus the
SMB is greater than SMC. As the
PMB shifted to right the quantity
increases to Q1 which is the
socially optimum level. But the
prices increased to P1 from P*.
After subsidization
In the diagram, the SMC has
shifted to the black curve showing
the costs after provision of
subsidy. Shifting of SMC to the
right, the social optimum level Q1
has been achieved at the price P2
which is significantly low.
Government’s subsidy resulted
the positive externality to retain
at a lower price for the consumer.
Hence, the quantity increased
while the price decreased.
D = PMB
P 2
P *
Q *
Price
Quantity
SMB
P 1
Q 1
Potential gain
D = PMB
P 2
P *
Q *
Price
Quantity
SMB
P 1
Q 1
Government subsidy
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
29
Therefore, considering the positive externalities resulting from the production and consumption of these
services which profits the whole community directly and indirectly, the government shall subsidize these
economic sectors. Subsidization supports the production which ultimately increases the output and decreases
the costs incurred and the prices.
CONCLUSION
The global and local oil production and price of oil can have its positive and negative effects on any
economy since, each and every country requires energy to its industrial productions and survival. Malaysian
economy also has had to face the deficits of plunging oil prices. Malaysia being a price taker in the global oil
market, there’s no broad control in the global oil industry and market.
The export of oil and the policy on production through PSC’s have been favorable to Malaysia. The
depreciating Ringgit value is alarming since this can affect the total output and the aggregate demand of the
Malaysian economy. A sound macroeconomic policy mix if implemented well considering the level of
effects through the combination of monetary and fiscal policy can save the Asia’s second largest energy
producer from heading to a recession.
Ibrahim Saheshan Ali (ac3620) Economic Analysis for business _Report
30
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