BUSINESS SCHOOL

SEMESTER JANUARY 2014

BBEK4203
PRINCIPLES OF MACROECONOMICS

EKMATUL MANURAH BINTI IKHTIMAN

MATRICULATION NO.

780529065374001

IDENTITY CARD NO.

780529-06-5374

MOBILE NO.

019-3935233

E-MAIL ADDRESS

ekmatul_manurah@oum.edu.my

LEARNING CENTRE

PETALING JAYA

Principles of Macroeconomics

TABLE OF CONTENTS

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PAGES

1. Introduction : Importance of national production to nations economic

growth................................................................................................................ 3
2. Explanation on the concept of national production of a nation......................... 4
3. Internal factors that influence the fluctuations of Malaysias
production level................................................................................................. 9
4. Discussion on external factors that influence the fluctuation of Malaysias
production level................................................................................................ 14
5. Conclusion........................................................................................................ 17

References

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1. 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 entrepreneurship
1.1 Four factors that promote nations economic growth.
i) Human Resources
Quality 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 Resources
Land 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
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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) Community
In 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.

GDP = C + G + I + NX
C

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

- the sum of government spending.

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

NX

- the nations total net export, calculated as total export minus import
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(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 GDP
There are three approaches to calculate GDP such as expenditure approach,
production and income approach.
2.3.1

: Expenditure 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). Here is an equation that sums it up based on the
Pie Chart 1 below :

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Table 1 : Component of GDP 2005 2012 The Expenditure Approach

Calculation 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 +
828m
Total Expenditure = GDP = RM941,237 million
Based 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.

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2.3.2

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: 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 Method
Example 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)
TOTAL VALUE-ADDED

= RM2.00
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.

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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 million
2.3.3

: Income Approach

The 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
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Indirect business tax = RM5

GDP 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 = RM180
GDP at market price = RM180
GDP at factor cost = RM60 + RM180 = RM240 = total value-added
3. Internal factors that influence the fluctuations of Malaysias production level
The 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 19912005 ) . 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 .
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Pie Chart 1 : Percentage of GDP 2005 2012 The Private Final Consumption Expenditure

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

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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

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Graph 1 : Malaysia Employment Persons

Based 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.

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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.

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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 Trade
The 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
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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 Export

2. 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.
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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 2002-2011

3. 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
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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. Conclusion
Economic 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,
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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 3320

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References

Laman 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_asli20
12.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:senarailaporan-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

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Sumber : Jabatan Perangkaan Malaysia dan Bank Negara Malaysia

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