The Importance of economic analysis

Economic analysis is a process whereby strengths and weaknesses of an economy are analyzed. Economic analysis is important in order to understand exact condition of an economy. It can cover a number of important economic issues that keep cropping up within a particular economy, which is being analyzed.

1.2 The World Economy

The world economy in this term refers to the economy that is based on world’s economies or national economies. Evaluation can be done in various ways. For instance, in the year 2006, valuation arrived in a certain currency such as US dollars.

It also focuses on trade policy issues on country basis, regionally and globally. It also extends to broader issues; exchange rate, International Monetary Fund (IMF)/World Bank, debt, environment and other international issues as they relate to trade.

1.2.1 The Developed Countries

Defined in many names such as advanced country, more developed country (MDC), more economically developed country (MEDC), post-industrial country. The term developed country is used to represent countries that have high level of development based on certain criteria, such criteria are income per capita; countries with high gross domestic product (GDP) per capita. Industrialization is another criterion. Countries with tertiary and quaternary sectors of industry dominate would be described as developed. Human Development Index (HDI) is yet another recent measure that combines an economic measure, national income, indices for life expectancy and education as well has become major contribution criteria.

United States of America

Take United States of America (U.S) as prime example as a leading developed country, is the third largest by land area and population with 9.83 million km2 and with over 310 million people. U.S is the world’s largest national economy, estimated GDP of $14.3 trillion in 2009. International Monetary Fund (IMF) said that the U.S GDP of $14.4 trillion constitutes 24% of the gross world product (GWP) at market exchange rates and almost 21% of the gross world product at purchasing power parity (PPP). The country is also the largest importer of goods and third largest exporter. The total U.S trade deficit was $696 billion in 2008 and Canada, China, Mexico, Japan and Germany as its trading partners.

The GDP of U.S in 2010 was 2.8%, mean while in 2009, -2.6% was recorded as the growth GDP of U.S. The year 2008 had recorded 0% GDP, worst since the 1982 recession. In 2007 and 2006 have respectively 1.9% and 2.7% GDP growth rate.

Vehicles contributed in the leading import and export commodity in 2007. U.S ranks second in the Global Competitiveness Report as Japan as its largest holder of U.S public debt surpassed China in early 2010. In addition, U.S is also the third largest producer of oil as well as its largest importer in the world. The economy is postindustrial with the service sector contributing 67.8% of GDP.

In 2009, the private sector in 2009 alone contributed 55.3% of the economy. In 2010, the labour force comprised 154.1 million people and 21.2 million people in the government leading the field of employment.

In the United States, the monetary policy is determined and implemented by the Federal Reserve System, commonly known as Federal Reserve. Federal Reserve implemented monetary policy by undergoing operations that influence short term interest rates. It also control the most narrow form of money, physical cash outstanding along with the reserves of banks throughout the country, for short, Federal Reserve indirectly influences the supply of other types of money.

The U.S inflation rate was last reported at 1.50% in December of 2010. From 1914 until 2010, the average inflation rate was 3.38% reaching historical high of 23.70% in June of 1920 and record low of -15,80% in June 1921.

Japan

As one of the strong members of the G8 countries, Japan is highly recognized as world’s third largest donor of official development assistance after the United States and France, donating US$9.48 billion in 2009. Having strong foreign relation such as stated above, Japan emerged as the most developed nation in Asia.

The period of overall real economic growth from the 1960s to the 1980s averaged 7.5% in the 1960s and 1970s, and 3.2% in the 1980s and early 1990s. However growth slowed markedly in the 1990s during what the Japanese call the Lost Decade, largely because of the after-effects of the Japanese asset price bubble and domestic policies intended to wring speculative excesses from the stock and real estate markets. Government efforts to revive economic growth met with little success and were further hampered by the global slowdown in 2000. The economy showed strong signs of recovery after 2005. GDP growth for that year was 2.8%, with an annualized fourth quarter expansion of 5.5%, surpassing the growth rates of the US and European Union during the same period. As of 2010, Japan is the third largest economy in the world, after the United States and China, at around US$5 trillion in terms of nominal GDP and fourth after the United States, the European Union and China in terms of purchasing power parity.

Japan’s main exports are transportation equipment, motor vehicles, electronics, electrical machinery and chemicals. Japan main import are China with 22.2%, U.S with 10.96%, Australia with 6.29%, Saudi Arabia with 5.29% and much more with main import of machinery equipment, fossils fuels, foodstuff such as beef, chemicals, textiles and raw materials. With the administration of Junichiro Koizumi, some pro-competition reforms and foreign investment in Japan has grown recently.

Japan’s inflation rate was last reported at 0.1% in November of 2010. From 1971 until 2010, the average inflation rate in Japan was 2.97% reaching an historical high of 24.90% in February of 1974 and a record low of -2.50% in October of 2009.

Today Japan is home to some of the world’s largest banks, and the Tokyo Stock Exchange which stand as the second largest in the world by market capitalization.

1.2.2 Developing Countries

Developing country generally refers to a nation with a low level of material well-being, however not to be confused with the third world countries. The development may vary within this region of countries. In addtion, some developing countries have high average standards of living. Countries with more advanced economies that other developing nations, however have not fully demonstrated the signs of a developed country are still considered to be under the term newly industralized countries.

Indonesia

With the population of 238 million people,Indonesia is the fourth most populous country in the world. Indonesia is a founding member of ASEAN and a member of the G-20 major economies. The Indonesian economy is the world’s eighteenth largest economy by nominal GDP and fifteenth largest by purchasing power parity.  Although Indonesia’s economy grew with impressive speed during the 1980s and 1990s, it experienced considerable trouble after the financial crisis of 1997, which led to significant political reforms. Today Indonesia’s economy is recovering but it is difficult to say when all its problems will be solved.

Even though Indonesia can still be considered part of the developing world, it has a rich and versatile past, in the economic as well as the cultural and political sense. At 13 July 2010, Japan Credit Rating Agency has upgraded Indonesia’s investment grade from BB+ to BBB,which is,proper to invest according to Investment Grade. And it seems will be followed by Fitch Rating to give Investment Grade to Indonesia due to it already rates one notch below investment grade. At January 17, 2011 Moody’s rating gave Indonesia Ba1 (one notch below Investment Grade) with a stable outlook. As at end of December 2010, Bank Indonesia Rate is still same of several months,which is,6.50 percent, whereas Consumer Price Index Inflation is 6.96 percent (year on year) and Reserve Assets is $96,207 million. 

Indonesia has a market economy in which the government plays a significant role. It is the largest economy in Southeast Asia and a member of the G-20 major economies. Indonesia’s estimated gross domestic product (nominal),purchasing power parity aside for 2008 was US$539.7 billion with estimated nominal per capita GDP was US$2,329, and per capita GDP PPP was US$4,157 (international dollars). The services sector is the economy’s largest and accounts for 45.3% of GDP (2005). This is followed by industry,40.7% and agriculture,14.0%. However, agriculture employs more people than other sectors, accounting for 44.3% of the 95 million-strong workforce. This is followed by the services sector,36.9% and industry,18.8%. Major industries include petroleum and natural gas, textiles, apparel, and mining. Major agricultural products include palm oil, rice, tea, coffee, spices, and rubber.

Nigeria

Nigeria is a West African economy with a long coastline along the Atlantic Ocean. The country shares international borders with Benin, Chad, Cameroon and Niger. According to the 2009 estimation, the country has a total population in of 154 million, with almost 70% live below the international poverty line. Nigeria’s economy is overly dependent on the petroleum sector. It is the 12th largest producer of petroleum products in the world.

The Nigerian economy is one of the most developed economies in Africa. Owing to the surge in international oil prices during 2007-08,Nigerian GDP at purchasing power parity more than doubled from $170.7 billion in 2005 to $374.3 billion in 2010, although estimation of the size of the informal sector put the actual numbers closer to $520 billion. Correspondingly, the GDP per capita doubled from $1200 per person in 2005 to an estimated of $2,500 per person in 2009. It is the largest economy in the West Africa Region, 3rd largest economy in Africa-behind South Africa and Egypt, and on track to becoming one of the top 30 economies in the world in the early part of 2011.

Holistically, 80 percent of Nigeria’s energy revenues flow to the government, 16 percent cover on the operational costs, and the remaining 4 percent go to investors. Outside of the energy sector, Nigeria’s economy is highly inefficient. Moreover, human capital is underdeveloped and Nigeria ranked 151 out of 177 countries in the United Nations Development Index in 2004,and non-energy-related infrastructure is inadequate.

1.2.3 Third World Countries

Countries of the third world arose during the Cold War are countries that remained non-aligned or not in motion with either capitalism and North Atlantic Treaty Organization (NATO). This definition provided a way of broadly categorizing the nations of the Earth into three groups based on social, political, and economic divisions. Today the term is often used to describe the developing countries of Africa, Asia, Latin America and Oceania and many more poorer nations that adopted the term to describe themselves.

Bangladesh

Bangladesh is an agricultural country,with over three to fifths of the population engaged in farming. Jute and tea are the main sources of foreign exchange of the country. The economy of Bangladesh is a developing on market-based economy. Its per capita income in 2008 was estimates as US$1,500. According to the International Monetary Fund,with a gross domestic product of US$256 billion Bangladesh ranked as the 48th largest economy in the world in 2009. The economy has grown at the rate of 6-7% over the past few years.

More than half of the country GDP belongs to the service sector,and nearly half of Bangladeshis are employed in the agriculture sector, with RMG, fish, vegetables, leather and leather goods, ceramics, rice as other important produce. The stock market capitalization of the Dhaka Stock Exchange in Bangladesh crossed $ 10 billion in November 2007 and the $30 billion dollar mark in 2009, and USD 50 billion in August 2010.

Bangladesh historically has run a large trade deficit, financed largely through aid receipts and remittances from workers overseas. Foreign reserves dropped markedly in 2001 but stabilized in the USD3 to USD4 billion range,or in about 3 months’ import cover. In January 2007, they reserves stood at $3.74 billion, and they increased to $5.8 billion by January 2008. In Nov 2009,it surpassed $10.0 billion according to the central bank,Bank of Bangladesh. In addition,imports and aid-dependence of the country has systematically been reduced since the beginning of 1990s.

Bangladesh had one of the best performing stock markets in the world during the recent global recession, due to relatively low correlations with developed country stock markets. Major investment in real estate by domestic and foreign-resident Bangladeshis has led to a massive building boom in Dhaka and Chittagong.

Yemen

Yemen is one of the poorest countries in the Arab world, reported strong growth in the mid-1990s with the onset of oil production. It has been harmed by periodic declines in oil prices, but now benefits from current high prices. Yemen has embarked on an IMF-supported structural adjustment program designed to modernize and streamline the economy, which has led to substantial foreign debt relief and restructuring. Through the international donors, meeting in Paris in October 2002,Yemen received on a further $2.3 billion economic support package. Yemen has worked to maintain tight control over spending and to implement additional components of the IMF program. A markedly high population growth rate and internal political dissension complicate the government’s task. Plans include a diversification of the economy, encouragement of tourism, and more efficient use of scarce water resources.

Agriculture is the mainstay of Yemen’s economy. Generating more than 20 percent of gross domestic product (GDP) since 1990,which was,20.4 percent in 2005 according to the Central Bank of Yemen and employing more than half,which was,54.2 percent in 2003,of the working population. However, the U.S. government estimate suggests that the sector accounted for only 13.5 percent of GDP in 2005. Numerous environmental problems hamper growth in this sector includes soil erosion, sand dune encroachment, and deforestation but the greatest problem by far is the scarcity of water. As a result of low levels of rainfall, agriculture in Yemen relies heavily on the extraction of groundwater, a resource that is being depleted. Yemen’s water tables are falling by approximately two meters a year, and it is estimated that Sanaa’s groundwater supplies could be exhausted by 2008. The use of irrigation has made fruit and vegetables Yemen’s primary cash crops. With the rise in the output of irrigated crops, the production of traditional rain-fed crops such as cereals has declined.

Yemen also is a small oil producer and does not belong to the Organization of the Petroleum Exporting Countries (OPEC). Unlike many regional oil producers, Yemen relies heavily on foreign oil companies that have production-sharing agreements with the government. Income from oil production constitutes 70 to 75 percent of government revenue and about 90 percent of exports. Yemen contains proven crude oil reserves of more than 4 billion barrels (640,000,000 m3), although these reserves are not expected to last more than 9 years, and output from the country’s older fields is falling, a concern since oil provides around 90% of the country’s exports.

Yemen experienced a very high average rate of inflation, which was,40 percent. Economic reforms brought this rate down to only 5.4 percent in 1997, but high oil prices and cuts in the fuel subsidy in recent years have had a negative impact on the inflation rate, which has generally been on the rise despite some fluctuations. In 2004,efforts by the Central Bank of Yemen to tighten the money supply were offset by a weakening U.S. dollar, to which the Yemeni riyal is linked in a managed float, and by rising global commodity prices, resulting in an inflation rate of 12.5 percent. In July 2005, the government succumbed to public opposition and lowered the new general sales tax from 10 to 5 percent. This tax, coupled with reductions in government fuel subsidies and higher import prices, is expected to result in an estimated inflation rate of 15 percent in 2006, up from 11.8 percent in 2005.

Yemen does not have a stock exchange, therefore limiting inward portfolio investment. Portfolio investment abroad is also very limited, with the result that portfolio flows are largely unrecorded by authorities.

1.3 The Regional Economy

Economic cooperation may persist among neighbouring countries, namely the ASEAN countries such as Malaysia, Indonesia, Thailand, Vietnam, China Japan and Philippines. The bilateral agreement corporation will be done to ensure the continuity and prosperity among the region. Raw material, labour and expertise can be acquired and utilize within the regions. The economic and political stability is important so that the region can benefit from these stability.

China 

China’s economy is huge and expanding rapidly. In the last 30 years the rate of China’s economic growth has been almost miraculous with averaging 8% growth in Gross Domestic Product (GDP) per annum. GDP in China increased from 2005 to 2007. In 2005, GDP is 9.9%, in 2006 GDP is 11.1% and mean while in 2007, the GDP is 11.4%. In 2008, GDP in China started to decrease to 9.6% and in 2009 further plummeted to 8.7%. In 2010 GDP of China is said to be is around 10%. 

The inflation rate in China was last reported at 5.1% in November of 2010. From 1994 until 2010, the average inflation rate in China was 4.25% reaching an historical high of 27.70% in October of 1994 with a record low of -2.20% in March of 1999.

International balance of payments remained “double surplus” in current account and capital account in 2008, but the growth rate had slowed. The current account surplus, which includes merchandise trade and services, is estimated at $440 billion in 2008, up 20 percent year-on-year. However, the growth was 27 percentage points lower than the previous year. The relation between domestic investment and economic growth is a bi-directional causality. There is only a single-directional causality from foreign direct investment to domestic investment and to economic growth.

Unemployment rate of china in cities and towns below 5%, 0.8% higher than at the end of 2005, by creating job opportunities for an additional 45 million people. Millions of jobs will also have to be created to accommodate the additional 45 million migrant workers who are encouraged to leave rural areas to reduce the labour force surplus in the countryside. As the world’s most populous country, China will continue to be troubled by unemployment in future years. China’s labor supply is expected to top 830 million by 2010. In urban regions, 50 million people will join the labor force. Most of the employment pressure stems from laid-off workers from state or collective-owned businesses, an increasing number of college graduates rural labor transfer and farmers who lost their land due to industrial development or urbanization.

The key monetary policy instruments in china include not only interest rate but also money supply and bank reserve ratio. In China, the interest rate impact on the economy is less effective due to a number of reasons. Firstly, has not been fully liberalized the interest rate system. Despite growing reliance on OMOS, bank deposit and lending rates are largely dictated by the central bank. Secondly, four large state-owned banks is dominate the banking industry, which enjoy significant oligopolistic market power. Thirdly, in early 1990s, despite the establishment of coporate bond and stock markets, bank lending remains the main source of funding for Chinese enterprises, particularly the state-owned enterprises. Lastly, the effective of interest rate as a monetary policy instrument is has reduce by the specific consumption habit of Chinese consumers. Chinese people tend to have a high saving rate, their consumption is not sensitive to interest rate changes, either. That mentioned that china cannot just rely on interest rate.

Thailand

According to the Economic Outlook in Thailand, the growth in Gross Domestic Product (GDP) for Thailand economy is positive of GPD in 2005 is 4.6% , in 2006 slightly increase to 5.15%, however when downstream with 4.93% in 2007. In 2008 on the other hand, China showed serious GDP plummet of 2.46% and in 2005 things finally turn around with a major increases 4.6%. GDP in 2011 is predicted to be around 4%, with political uncertainty continuing to undermine consumer and business confidence. 

Thailand raised its benchmark interest rate for the fourth time in seven months and signal it will boost borrowing costs further to contain inflation, spurring gains in the country’s currency. Inflationary pressure going forward is still expected to increase as the economy continues to grow and oil and commodity prices are on an uptrend. The inflation rate of Thailand in 2005 to 2007 is increase that is in 2005 inflation rate is 2.80%,in 2006 is 4.50% and in 2007 is 5.10% after that in 2008 it become 2.20% it decrease from last year, but in 2009 it increase again to 5.50% and in 2010 inflation rate in Thailand decrease to -0.90%.

Political difficulties are nevertheless likely to continue in Thailand to complicate the public sector’s plans for large-scale investment. Furthermore, although the tourism sector is already showing signs of healthy recovery, further bouts of violence in the country would stall this process.

In international trade on the other hand, the Economist Intelligence Unit (EIU) forecasts that Thailand’s current trade account will remain in the black, but the surplus will decline to the equivalent of 4.3% of GDP on average in 2010-11, from 7.7% in 2009 when merchandise imports contracted even more sharply than exports.

Although the recovery in global demand is slackening, Thailand’s exporters will continue to show growth in revenue and will maintain their competitiveness in number sectors, most notably electronics and vehicles. The import bill will also rise in 2010-11 as growth in consumption and investment resumes. The increase in imports will be particularly strong this year, reflecting the steep drop recorded last year.

1.4 The Domestic Economy

Malaysia domestic economy is affected by global and regional performances. Based on the previous report, our economy performance positively strong because of two sectors that is oil but slow in electronic sectors.

1.4.1 GDP and GNP Development

Based on that report, our country Gross Domestic Product are 6.30% according to World Bank statement. In December 2008, on that year our country achieved the highest recorded then in 2006 and 2007 that is 5.20% and 6.30%, but in 2009 our GDP goes down at 4.60% in March. In 2010 our GDP -1.70% it also decline.

Gross National Product (GNP) since year 2006 until 2010 is increasing every years. For the year 2006, RM424, 294 was recorded, in 2007, RM454, 625 and in 2007, RM482, 239. In the year 2008, it is recorded RM496, 077 in the year 2009 is RM504, 864 and for the year 2010 is RM515, 292.

1.4.2 Inflation and Interest Rate Development and Control

Our inflation rate since 2006 until 2009 was in quite a fluctuated condition. Our country has achieved its highest inflation rate at 3.80% where is at that time the country is facing a financial crisis. In 2005, we can observe the lowest inflation rate was at 2.00%.

Interest rate from year the 2004 until 2010, the average interest rate is 2.91%. The lowest interest rate is at year2009 at 2.00% and the highest interest rate at year2006 at 3.50%.

1.4.3 Balance of Payment

For the year 2008, the total trade by Malaysia raise to RM80.5 trillion, 6.8% more than in the year 2007. Exports increase to RM663.5 billion recording to it 9.6% increase and the imports also rose to RM521.5 billion registering 3.3% growth, ensuing RM142 billion in trade surplus. Though, the import export in Malaysia decreased in December 2008, but it still shows the trade surplus of RM11.67 million. Comparing in quarterly terms, RM269.84 billion worth of trade are register in the 4th quarter of the year 2008, a decline of 9.6% from 4th quarter of the year 2007. Decline of RM151.3 (7.4%) is record in exports and imports in Malaysia go down to RM118.5 at 12.3%.

1.4.4 Monetary Policy

Management of monetary policy focused primarily on maintaining the exchange rate. Liquidity management aimed at keeping interest rate at levels conducive to economic growth, exploiting the room for manoeuvre created by the capital controls. Between 1998 and 2003, BNM was able to effect monetary policy based on domestic policy objectives, mainly because most of the inflows were on account of trade flows, rather than capital flows. Other than that, it stabilizing domestic inflation and preserving the purchase power of the domestic currency, the Ringgit, to advise macroeconomic policies to the government and to manage the amount of national debt. 

In 2008, government has reduced the overnight rate (OPR) 75 basis points to 2.50% with immediate effect. Then the ceiling and floor also reduced to 2.75% and 2.25%. From 1 February 2009, statutory reserve requirement also reduced from 3.5% to 2%. These reductions happen in order to aimed to be pre-emptive in providing a more supportive monetary environment for domestic economy.

On 26th January 2010, government maintained OPR unchanged at 2%. The latest, our country maintains the OPR at 2.75% starting at 12 November 2010.

1.4.5 Employment Rate

Malaysia employment rate fluctuated from 2005 until the year 2009. In the year 2005 is it at 3%, mean while in the year 2006, 3.6% was recorded. 3.5% for the 2007 and 2008 with 3.2%, and 3.30% for the year 2009.