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1. How has an open trading system helped Malaysia? How has it hurt Malaysia?
However, arguments against this trade system tend to be voiced during period of
excess production capacity and high unemployment. This may led to many
Malaysians fear getting laid off, especially at those firms operating in import-
competing industries. Also, workers face demands of wages concessions from their
employees, which often threaten to export jobs abroad if wages concessions are not
agreed to.
2. What do you think Malaysia’s competitive advantage is? Has it changed? What
was it before? Will it change in the future? What will it be?
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government to screen the type of investments that we want to promote in the country
given scarce resources.
Moreover, Malaysia has adopted long and medium term development plans that call
for the effective use of scarce resources through promoting investments in
appropriate and strategic industries. Multilateral rules could restrict the country's
ability to provide special incentives and privileges to local investors for social and
strategic reasons, as members may not be able to discriminate between local and
foreign investors once they are allowed into the host country. Malaysia attracts
foreign investment, in other words, she has a healthy economy, will tend to have a
net capital inflow and this will be associated with a trade deficit. There is every
reason to see the benefits of such a situation. Both the acquisition of imports and the
foreign investment are good for the country.
Malaysia trade statistics recorded a new high of RM34.66 billion, expanding 9.6%
from RM31.63 billion in May 2004. Import growth was mainly led by increase in
imports of intermediate and capital goods to sustain manufacturing activities to meet
external demand. As we noted, demand and supply condition determine the basis for
trade and the direction of the trade. Demand also helps establish the international
terms of trade, that is, the relative prices at which commodities are exchanged
between nations. If demand for imports of intermediate and capital goods increases,
the price for this particular product will rise; thus it will show a deterioration in a
Malaysia terms of trade that the prices of its exports fall relative to the prices of its
imports over the given time period. This may lead to reduced export sales and less
revenue earned from exports, and we could hardly say that Malaysia welfare has
improved.
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4. What is Malaysia’s industrial policy? What has the government tried to create a
comparative advantage in? Has it worked? Why or why not?
5. Which of the arguments for tariffs do you feel are most relevant in today’s
Malaysia? Why?
Malaysia feel that developed nations tend to insist that developing nations open their
markets to industrial products from the developed world, yet refuse to open their
markets to agriculture goods from the developing world. For example, United States
have used aggressive antidumping and countervailing duties to limit access to their
markets. Furthermore, the current concept of free trade supports the free movement
of products and employers, which favors the developed nations, but not the free
movement of employees (i.e., labor), which would favor the people of developing
nations.
6. Does Malaysia’s government provide any subsidies? If so, what kind and are
they effective? If not, should they? Why or why not?
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Intellectual property is an invention, idea, product, or process that has been registered
with the government and that awards the inventor (or author) exclusive rights to use
the invention for a given time period. Malaysia governments use several policies to
protect intellectual property such as copyrights are awarded to protect works of
original authorship (for example, music compositions, textbooks); trademark are
awarded to manufacturers and provide exclusive rights to a distinguishing name or
symbol (for example, “Coca-Cola”); patents secure to an inventor to a term, usually
15 years or more, the exclusive right to make, use, or sell the invention. Furthermore,
the government enforcement personnel always carry a raid to certain shopping areas
to strike at pirated goods such as automobile parts, jewelry, sporting goods and
watches, piracy of audio and videotapes, computer software, and printed materials.
To protect and respect the intellectual property, I will surely support the original
version, no matter music or video CD, or computer software and etc. I also do agree
with the government steps in protecting the intellectual property and give my full
cooperation by providing the useful information to the related authorities regarding
the illegal selling of counterfeit products.
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Malaysia has also concerns with commodity-price stabilization for its commodity
products such as palm oil and rubber; however, Malaysia has recently generated new
source of growth, resulting in manufacturing, which has become more diversified
with high-end, value-added and new emerging industries and products.
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10. What are the major industries in Malaysia in which foreigners place direct
investments? What are the major foreign industries in which Malaysian
businesses have chosen to place direct investments?
To aid the economic growth, Malaysia aims to make the region a competitive base to
attract foreign direct investment through the implementation of programs and
activities on investment liberalization, facilitation and promotion. The agreement
covers direct investment related to manufacturing, agriculture, fisheries, forestry and
mining, and services activities related to these sectors. On the other hand, ASEAN as
a group continues to be Malaysia’s largest trading partner. In 2002, total trade with
ASEAN was RM161.8 billion, accounting for 24.6 per cent of Malaysia’s global
trade. For Malaysia, pineapple canning, palm oil industry and refinery, sugar
refinery, sawn timber, veneer and plywood, petroleum refinery, batik, extraction of
timber, fisheries, cement and oleo-chemicals have been those businesses chosen to
place direct investments.
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11. What is meant by the balance of payments? Why does the balance-of-payments
statement “balance”? Is Malaysia’s current account in deficit or in surplus? Is
this a good thing? Why or why not?
From Malaysia external trade report, a trade surplus of RM 5.09 billion was recorded
in June 2004. This was the eightieth consecutive month of trade surplus since
November 1997. Trade figures for June show that Malaysia's total trade had grown
previous year. From a quarterly perspective, total trade for the second quarter of
2004 was 10.8% higher than that of the first quarter of 2004 and trade in June was
6.1% higher than that in May. Thus, this would either benefit exporting industries or
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12. Why are exchange rate quotations stated in different financial centers
consistent with one another? Is it better to have a strong or weak/dollar (and
Ringgit)? Why?
The Wall Street Journal’s foreign-exchange quotations include those of the New
York foreign-exchange market and the International Market located in Chicago. Both
spot quotations and forward quotations are provided. The exchange rate is the price
of one unit of foreign currency in terms of the domestic currency. A dollar
depreciation is an increase in the number of dollars required to buy a unit of foreign
exchange.
In the foreign-exchange market, currencies are traded around the clock and
throughout the world. Most foreign exchange trading is in the inter-bank market.
Banks typically engage in three types of foreign-exchange transaction: spot, forward,
and swap. The equilibrium rate of exchange in a free market is determined by the
intersection of the supply and demand schedules of foreign exchange. These
schedules are derived from the credit and debit items in a nation’s balance of
payments. Also, exchange arbitrage permits the rates of exchange in different parts
of the world to be kept the same. This is achieved by selling a currency when its
price is high, and purchasing when the price is low. Thus, exchange rate quotations
stated in different financial centers consistent with one another.
In my opinion, it is better to have a dollar (and ringgit) stabilized, and the foreign
trader and investor are advised to deal in the forward market for protection from
possible exchange rate fluctuation to ensure the steadily economic growth of the
world.
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13. Explain how the following factors affect the Dollar’s (and Ringgit’s) exchange
rates:
a) a rise in the US price level compared to foreign prices
b) tariffs and quotas placed in US imports
c) increased demand for Us exports
d) rising productivity in the US relative to other countries
e) rising deal interest rates overseas relative to US rate
f) an increase in US money growth
g) an increase in US money demand
Like other prices, the exchange rate in a free market is determined by both supply and
demand conditions. A nation’s demand for foreign exchange is derived from, or
corresponds to, the debit items on its balance of payments. The supply of foreign
exchange refers to the amount of foreign exchange that will be offered to the market
at various exchange rates, all other factors held constant. As long as monetary
authorities do not attempt to stabilize exchange rates or moderate their movements,
the equilibrium exchange rate is determined by the market forces of supply and
demand.
• A rise in the US price level compared to foreign prices will depreciate the effect
on the Dollar’s exchange value
• tariffs and quotas placed in US imports will appreciate the effect on the Dollar’s
exchange value
• increased demand for Us exports will appreciate the effect on the Dollar’s
exchange value
• rising productivity in the US relative to other countries will appreciate the effect
on the Dollar’s exchange value
• rising deal interest rates overseas relative to US rate will appreciate the effect on
the Dollar’s exchange value
• an increase in US money growth will appreciate the effect on the Dollar’s
exchange value
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14. How can adjustments in Malaysian domestic interest rates help promote
payments balance?
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15. Suppose ABC Inc. a US auto manufacturer building cars in Mexico sales,
obtains all of its auto components from the US and these costs are denominated
in dollars. Assume the dollar’s exchange rate appreciates against the Mexican
Peso. What happens to ABC’s costs and to the price of their cars in Mexico?
16. What factors underlie a nation’s decision to adopt floating or fixed exchange
rates? Why is the Ringgit pegged to the US dollar? Should Malaysia’s currency
be allowed to float?
Instead of utilizing fixed exchange rates, some nations allow their currencies float in
the foreign-exchange market. By floating (or flexible) exchange rates, means
currency prices that are established daily in the foreign-exchange market, without
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restrictions imposed by government policy on the extent to which the prices can
move. With floating rates, there is an equilibrium exchange rate that equates the
demand for and supply of the home currency. Changes in the exchange rate will
ideally correct a payments imbalance by bringing about shifts in imports and exports
of goods, services, and short-term capital movements.
Malaysia’s currency should float as it provides several benefits. First, the prices of
the traded products of many developing nations are determined primarily in the
markets of industrialized nations such as the United States; by pegging, say, to the
dollar, Malaysia can stabilize the domestic-currency prices of their imports and
exports. Second, many nations with high inflation have pegged to the dollar (the
United States has relatively low inflation) in order to exert restraint on domestic
policies and reduce inflation. Pegging the exchange rate may thus lessen inflationary
expectations, leading to lower interest rates, a lessening of the loss of output due to
disinflation, and a moderation of price pressures.
17. Distinguish among external balance, internal balance, and overall balance.
Which does Malaysia’s government strive for? Give some examples?
Given a fixed exchange-rate system, for monetary policy the disequilibrium zones of
employment-with-BOP-surplus and inflation-with-BOP-deficit are zones of policy
agreement. The disequilibrium zones of employment-with-BOP-deficit and inflation-
with-BOP-surplus are zones of policy conflict; a dilemma exists for monetary
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Additional export sales provide an injection of spending into the economy, which
encourages additional production and thus reduces the level of unemployment. In
terms of the figure, the currency depreciation induces movement in a northeasterly
direction, promoting both internal balance and external balance.
18. A nation’s need for international reserves is similar to your personal desire to
hold a cash balance. Explain.
Just as an individual desires to hold cash balances, national governments have a need
for international reserves. The chief purpose of international reserves is to enable
nation to finance disequilibrium in their balance-of-payments positions. When a
nation finds its monetary receipts falling short of its monetary payments, the deficit
is settled with international reserves. Eventually, the deficit must be eliminated,
because central banks end to have limited stocks of reserves.
From a policy perspective, the advantage of international reserves is that they enable
nations to sustain temporary balance-of-payments deficits until acceptable
adjustment measures can operate to correct the disequilibrium. Holdings of
international reserves facilitate effective policy formation because corrective
adjustment measures need not be implemented prematurely. Should a deficit nation
posses abundant stocks of reserves balances, however, it may be able to resist
unpopular adjustment measures, making eventual adjustments even more
troublesome.
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