Principles of Macroeconomics BBEK4203

BUSINESS SCHOOLSEMESTER JANUARY 2014BBEK4203PRINCIPLES OF MACROECONOMICS EKMATUL MANURAH BINTI IKHTIMANMATRICULATION NO.

: 780529065374001IDENTITY CARD NO.

: 780529-06-5374MOBILE NO.

: 019-3935233E-MAIL ADDRESS

: ekmatul_manurah@oum.edu.myLEARNING CENTRE

: PETALING JAYATABLE OF CONTENTS

PAGES1. Introduction : Importance of national production to nations economic

growth................................................................................................................ 32. Explanation on the concept of national production of a nation......................... 43. Internal factors that influence the fluctuations of Malaysias

production level................................................................................................. 94. Discussion on external factors that influence the fluctuation of Malaysias

production level................................................................................................ 145. Conclusion........................................................................................................ 17References1. Introduction : Importance of national production to nations economic growth.National product is the total value of the goods and services produce by a country during a particular period , usually a year. Economic growth is the increase in the market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product. There are several factors that influence nation economic growth such as human capital, natural resources, capital goods and entrepreneurship1.1 Four factors that promote nations economic growth.i) Human ResourcesQuality of the human capital of a country's society is one of the important factors that affect a country's economic growth. In order to for a country to have an incresing Gross Domestic Product, it must invest in human capital through education and training, and it must produce goods that have value to be sold within the country or exported.The higher a country GDP its mean that quality of life and standard living increased. The total population of a country will influence the broader market economy. The population will increase demand and to meet this demand, then push the operators to increase production.ii) Natural ResourcesLand and natural resource wealth of high value in a country that is a major factor in contributing to economic development. Resources or wealth of a country's natural resources such as petroleum, coal, tin, iron ore, forests and more able to attract investors to develop an industry. The economic value of activities carried processing of natural resources will make it a long-term economic activity. Please also note that economic growth in several Asia country also start from the petroleum sector.Country that have a lot of nature resources are able to use them to produce goods and services cheaper than a country that has to import natural resources.iii) Capital To increased GDP country must also invest in capital goods that all of the factories, machines, technology, computers, building and property needed by businesses to operate. Capital goods increased their rate of economic growth in which capital goods will determine the amount of product to be produced in which an increasing number of capital goods, the higher the product produced in an economy. Advances in technology also plays a role in the production of products more efficiently. Technology may be able to accelerate the economic growth of a country in which the technology is able to create new products more innovative, high quality and have high economic value.iv) CommunityIn the process of a country's economic growth, social systems and social attitudes also play an important role. There are some position or ceremonial habit practiced traditional since generations will push reforms or use the product more productive and efficient. This rejection will make a country's economic growth was aborted. However, the country has people who like to do business or entrepreneur will have an impact and help in the economic unemployment. The more entreprenuers a country has, the higher GDP of the country will received.2. Concept of national production of a nation.

There are 2 type of national production concept that Malaysia applies which are Gross Domestic Product (GDP) and Gross National Product (GNP).2.1 Gross Domestic Product (GDP) Concept

Gross Domestic Product (GDP) means the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

C- private consumption or consumer spending, in a nation economy.

G- the sum of government spending.

I- the sum of all the countrys business spending on capital.

NX- the nations total net export, calculated as total export minus import

(NX = Export Import)Consumption is the largest component of the GDP. Consumption is calculated by adding durable and non-durable goods and services expenditures. Investment includes investment in fixed asset and increase in inventory. Government purchases are equal to the government expenditures less government transfer payments. Net exports are exports minus imports. Imports are subtracted since GDP is defined as the output of the domestic economy.2.2 Gross National Product (GNP)

It measures the total income earned by consumers of an economy from engaging in various economic activities, irrespective of whether the economic activities are carried out within the economic territory or outside, in a specified period of time. From GDP to GNP:

GNP = GDP + Income earned by residents outside the economic territory - Income earned by non-residents within the economic territory.

GNP = GDP + Net Factor Income from abroad (NIA).NIA = Net External factor income flows. 2.3 Method of calculating GDPThere are three approaches to calculate GDP such as expenditure approach, production and income approach.

2.3.1 : Expenditure ApproachThe expenditure approach involves counting expenditures on goods and services by different groups in the economy. The four main components are consumption expenditures by households (C), gross private investment spending principally by firms (I), government purchases of goods and services (G), and net exports (exports minus imports EX - IM). Here is an equation that sums it up based on the Pie Chart 1 below :

Table 1 : Component of GDP 2005 2012 The Expenditure ApproachCalculation Formula of National Income 2012 using Expenditure Approach Method :

Total Expenditure = GDP = C + I + G + (EX IM)

Total Expenditure = GDP = 459,862m + 127,203m + 241,733m + 111,611m + 828mTotal Expenditure = GDP = RM941,237 millionBased on calculation table above expenditures can be broken down into the four components given in the table 2 above. The largest is personal consumption spending by Private final consumption expenditure 48.9% which expenditure by purpose of goods covered by 50.6%. Households can buy durable goods, those that last for some period of time, such as motor vehicles and furniture, as listed in the table. In addition, households can purchase nondurable goods, which are goods not intended for long-term use, such as food, clothing, and gasoline. Households also purchase services, which are actions rather than physical items. Examples of services range from medical care, car repairs and other transportation expenses, to haircuts and tax preparation services.

2.3.2 : Production Approach

Production approach measure the total amount of market value of all final goods and services. Sometime it is difficult to distinguish between intermediate goods and final goods and to avoid , double counting value-method value is used. Value-added MethodExample 1 :GDP = sum of value-added

1. Farmers value-added

RM3.50 (wheat) 0 (cost)

= RM3.50

2. Flour-making factory

RM5.5 (flour) RM3.5 (wheat)

= RM2.00

3. Bakery shop

RM7.50 (bread) RM5.50 (flour)= RM2.00

TOTAL VALUE-ADDED RM7.50

Based on the examples above there are three process to produce a bread. Stage 1 wheat has sold to flour-making factory for RM3.50 and the value-added for this stage is RM3.50. Then the factory-making factory use wheat to make a flour and sells it to Bakery shop for RM5.50. This process adds a value of RM2.00 to the original RM3.50. Final stage of production bread sold by Bakery shop to consumers for RM7.50 and the value of RM2.00 has been added in this stage. Total value added is RM7.50 and based on production approach only value of finals goods and services taken into account when calculating the national income. So the final goods value is the same as total value-added.

Table 2 : Percentage of GDP 2005-2012 The Production Approach

Calculation Formula of National Income 2012 using Production Approach Method :

Example 2

Total Production = GDP = Agriculture + Mining & Quarrying + Manufacturing + Construction + Services + Import Duties

Total Production = 94,632m + 97,987m + 36,362m + 228,141m + 473,929m + 10,186

Total Production = GDP = 941,237 million2.3.3 : Income ApproachThe expenditures on goods and services by consumers provide income for firms. Similarly, government expenditures on goods and services provide income for the firms supplying products and the workers supplying services. Thus, the flip side of the expenditure approach is to add together the income for different components of the economy. In theory, no government intervention local production of kettle RM54.Market value = factor income

= total cost

= total value-added = RM54

But if there is indirect tax or subsidies, Market value total value-added

Example 3 : Kettle : market price = RM54

Indirect business tax = RM5GDP at market price = RM54

GDP at factor cost = RM54 RM5 = RM49 = total value-added

Example 4 : Education in university

Total value-added in university = RM240

Subsidy = RM 60

School fee = RM180GDP at market price = RM180GDP at factor cost = RM60 + RM180 = RM240 = total value-added3. Internal factors that influence the fluctuations of Malaysias production levelThe level and fluctuations of the Malaysian production is influenced by internal factors.1. Government Policy

Private Final Consumption Expenditure (Perbelanjaan Pengguna Swasta-PPS). This expenditure is an important internal factor in determining the growth of the economy as a positive improvement in line with the increase in the average annual income which is 5.6 % and 6.1 % in the real value in real income (GNP 1991-2005 ) . The year 2002-2005 has shown a significant rate of increase of 7.7 % compared to just 6.2 % in real income . This is due to the sentiment of consumers' confidence in domestic economic activities despite strong pressure from the world of the war in Iraq , the SARS outbreak and the rise in world oil prices . Encouraging good performance can be explained by an increase in consumer purchases of durable goods such as motorcycles and medium cars . Accordingly, the government has taken some emphasis on maintaining the performance improvement PPS growth other than monetary and fiscal policy as the economic package . New Economic Strategy Stimulate Economic Growth was launched in 2003 to help people in terms of the financial burden faced by the outbreak of SARS in which the employee's EPF contribution has been reduced, the added bonus for civil servants in place and lower the cost of doing business, especially tourism and construction. This development continued for subsequent years and are shown in the table below .

Pie Chart 1 : Percentage of GDP 2005 2012 The Private Final Consumption Expenditure

Table 3 : Percentage of GDP 2005-2012 The Expenditure Approach

2. Labor When looking at what makes an economy grow in the long run, it is imperative to begin by examining how output is created. Firms use a combination of labor and capital to produce their output. Labor consists of the workers and employees who produce, manage, and process production. Capital describes both the ideas needed for production and the actual tools and machines used in production. Ideas and other intellectual property are called human capital. Machinery and tools are called physical capital. Firms use some combination of labor and capital to produce output. In particular, the labor utilizes the capital in the production process. For example, when making cars, workers use tools and an assembly line to produce a finished product. The workers are the labor and the machines are the capital. In order to increase productivity, each worker must be able to produce more output. This is referred to as labor productivity growth. The only way for this to occur is through an in increase in the capital utilized in the production process. This increase can be in the form of either human capital or physical capital. It is important to remember that increases in capital can take the form of both quantity and quality increases. From these two examples, it is clear that the only way to achieve labor productivity growth is to increase the amount of capital, physical and/or human, available to workers. And in the long run, the only way for overall productivity to increase is though increases in the capital used in production.

Pie Chart 2 : Malaysia GDP Annual Growth Rate

Graph 1 : Malaysia Employment PersonsBased on the Malaysia Employment Persons Graph 4 shows that in year 2002 total of labor force is 9.5 million.This increase was caused by an employee of the school leavers aged 20-24 years of 50 % of the total. Highly educated labor force increased from 13.9% in 2002 to 16.6 % in 2002 the impact of the growth of private universities and colleges . Increased employment helps to increase economic activity , especially the service sector , which recorded 50 % of total employment . In 2007, total employment is 10.27 million in which all sectors of the economy to create jobs except farming . Services sector still remains the main contributor . Number of graduates in 2007 was 49,406 and in sustaining and improving employment skills the government has introduced Soft skills ( including English and Presentation ) and Academic Entrepreneurship module 2007/2008 on public universities . For Financial Services Sector initiative Financial Education Center . In 2012 the number of labor force increased to 12.12 million.3. Technology

The major way the quality of capital is increased is through technological progress, the fruit of research and development. Technological advances can allow a given unit of capital to enable a given unit of labor to increase production. This increase is contrasted to the increase created by simply enlarging capital expenditures. In the latter case, a given unit of labor has more capital to work with and can thus produce more output; while in the former case a given unit of labor can produce more output with a given unit of capital. How does technological progress come about? The major ways are though innovation and invention. Every year, billions of dollars are spent on research and development by firms and government agencies, like MEASAT and PETRONAS. This money leads to improvements in existing technology and to the creation of new technologies. While innovation and invention may not always be immediately profitable, in the long run they can prove very lucrative for the researchers and the developers--as well as for the economy as a whole, as new, more efficient production technologies become available.

Table 4 : The establishments involved in purchased and sales via the internet in the Petroleum and natural gas mining industry for the year 2010 and 2011 Refer to table 4 shows that the technology is applied in the mining of petroleum and natural gas for 2010 and 2011. It is clear that internet technology has enhanced production covering a total of 49% in 2010 and 39% in 2011 over the total revenue.

Table 5 : Exports and Imports of petroleum based products, 2002-2011

4. External factors that influence the fluctuations Malaysias production level.1. Foreign Exchange Rate / International TradeThe stability of the exchange rate is affecting the export sector and a country's capital flows. This will ensure the economic stability of the country. The rise in the exchange rate of the domestic currency depreciation would cause local n goods become cheaper compared to foreign goods. The demand for local goods this will lead to increased exports. According to the research in Malaysia, Kutan and Dibooglu (1998) fixing the exchange rate at the right will have a positive effect on economic growth of a country. This can be proved by the U.S. financial crisis of 2008 in which many countries have experienced economic decline overnight, including Malaysia, due to the instability of the exchange rate. Foreign currency exchange rates had a positive impact on exports of Malaysia to be competitive at any rate Malaysia's exports in line with any increase or decrease in revenue. This is because the export sector is the second largest contributor to GDP in Malaysia, recorded RM357.4 billion in the year 2002 and is increasing at the rate of falls due to RM604.3 billion while the U.S. financial crisis and recovery 2008-2009 RM552.5 billion by a factor of more stable exchange rate in 2012 of RM702.2 billion. In the balance of payments model (BOPM) when the exchange rate falls then the price of domestic goods become cheaper and lower exports. According to the theory of spending and consumption, the change in the price level will cause consumption also change and cause the demand for foreign goods changed in turn affects the output. Exports is one of the country's domestic income variable.

Pie Chart 3 : Differentiate between GDP and Export2. Worlds Oil Price Rate (OIL)We have all been aware that price volatility worlds oil affect almost all sectors of the economy in the short term and long term. We have all been aware that price volatility worlds oil affect almost all sectors of the economy in the short term and long term. Worlds oil price level is the price of oil for all the reference amount spent per barrel. Usually shown in U.S. Dollars. It is the economic variables that could affect the global economy in the medium and long term. According to the concept of identification schemes all domestic variables can not influence foreign variables. It is based on the theory that a small economy can not influence the world economy because small economies are price receiver and cant determine the price. In addition, changes in domestic economic activity has no impact on the world economy.

Table 6 : Production of crude oil and natural gas 2002-20113. Foreign Investment

Malaysia is a country that relies heavily on international trade where export earnings and import expenditure is relatively large share of GDP. Shows the level of productivity growth in the usage of raw materials. If the economy is growing, it means that the production of goods and services to meet market demand. When factors of production which are provided with the best possible use and efficient, then this will have a positive effect on the level of production. Malaysia has introduced trade policies with a view to expand, enhance and diversify exports and as a result the total foreign trade has increased. According to Bela Balassa (1989) to study emprikal using Spearman Rank Correlation approach. The results show that a 1% increase in export growth will boost economic growth by 0.05%. This indicates that the use of intensive exports have a strong influence on economic growth. Causal relationship between economic growth and the cause of international trade will lead to an increase in revenue of the country's GDP with more international trade is carried out. At the same time a lot of income will encourage more commercial activity. Here exists a cycle virtous circle between economic growth and international trade.tributing to the country's GDP. Substantial percentage of export earnings prove that Malaysia's economic growth is highly dependent on international trade.

Graph 2 : Malaysians Trade Performance 2002-2012 5. ConclusionEconomic growth can be explained by the measurement of the performance of a country's economic development by increasing the rate of production of individual goods, infrastructure development, increase in school, increase economic sectors such as goods and services to the community and thus increase social welfare system has improved. This means that economic growth is the growth of output or production of the country. The rate of economic growth is dependent on an increase in the Gross Domestic Product (GDP). Gross domestic product is the total value of final goods and services produced by factors of production such as human resources, natural resources, capital and community in a country within one year. There are three approaches to calculate GDP such as expenditure approach, production and income approach. The expenditure approach involves counting expenditures on goods and services by different groups in the economy. The four main components are consumption expenditures by households (C), gross private investment spending principally by firms (I), government purchases of goods and services (G), and net exports (exports minus imports EX - IM). Production approach measure the total amount of market value of all final goods and services. The expenditures on goods and services by consumers provide income for firms. There are internal and external factors affecting the fluctuations of the economy. Internal factors that influence economic growth is government policy, labor and technology. While external factors that influence Malaysias economic growth such as foreign exchange/ international trade, worlds oil price and foreign investment. Early 2002 - 2004 witnessed the ups and downs of the economy due to the current market uncertainty, while 2003 saw economic growth has exceeded initial projections that are expected as a result of the SARS outbreak. around 2006 Malaysian economy grew by demonstrated with real GDP increased 5.9 higher than the 5.2% year lalu.Swasta largest in aggregate domestic demand strengthened by 7.4%. 2007 showed the nation's economy remains strong and real GDP increased by 6.3% better. Aggregate domestic demand will continue to increase by 10.5% and the private sector is also a major contributor. Somewhat degenerated GDP in 2008 to 4.6% as a result of the U.S. financial crisis. The development of aggregate domestic demand grew by 6.9%, supported by private consumption and public spending.Words count 3320ReferencesLaman Web Jabatan Perangkaan Malaysia (2014). Perangkaan Petroleum dan Gas Asli 2012 : [Online]. Available : http://www.statistics.gov.my/portal/download_Mining/files/Petroleum/petroleum_gas_asli2012.pdf. [28 Feb 2014].

Portal Rasmi Kementerian Kewangan Malaysia (2011). Laporan Ekonomi Malaysia 2002 2012 : [Online]. Available : http://www.treasury.gov.my/index.php?option=com_content&view=article&id=2011:laporan-ekonomi-20112012&catid=73:senarai-laporan-ekonomi&Itemid=174&lang=my. [27 March 2014].

Portal Rasmi Bank Negara Malaysia (2014). Bank Negara annual Report 2002-2012 : [Online]. Available : http://www.bnm.gov.my/index.php?ch=en_publication_catalogue&pg=en_publication_bnmar&ac=96&yr=2012&lang=en&eId=box2. [26 Feb 2014].

PROSIDING PERKEM VI, JILID 2 (2011) 272-281 ISSN:2231-962X

GDP = C + G + I + NX

Sumber : Jabatan Perangkaan Malaysia dan Bank Negara Malaysia

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