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BEEB 1013

PRINCIPLES OF ECONOMICS

ACADEMIC WRITING REPORT


:RISING COST OF LIVING

LECTURER NAME :DR MOHD RAZANI BIN MOHD JALI

WRITTEN BY: QROUP Q, CLASS N

BIL. GROUP MEMBERS NAME NO. MATRIK


1. YIP AIXIN 264247
2. Bobby Patrick anak Payit 264218
3. Muhammad Muizzuddin Bin Md Nasir 264232
4. Nur Atikah Binti Mokhtar 264177
Contents
CHAPTER ONE : PROLOGUE Page
1.1 Introduction
1.2 Research Background 2
1.3 Research Question
1.4 Research Objective
1.4.1 Identifying the Rising Cost of Living
1.4.2 Measuring the cost of living 3
1.4.3 Managing the number of population
1.5 Importance of Research
CHAPTER TWO : THEORY
2.1 Theory
2.1.1 The Reason Rising Cost Of Living 4-5
2.1.2 The Effect Rising Cost Of Living

2.2 Literature Review


2.2.1 The Effect of Government Policy On Living Cost 6-7
2.2.3 The Differences Cost of Living in Malaysia Compare to Other Country

CHAPTER THREE: RESEARCH ANALYSIS


3.1 Rising Cost Of Living in Malaysia
3.1.1 Factors Rising Cost Of Living 8-9
3.1.2 Reasons Rising Cost Of Living
3.2 Measuring the Cost Of Living
3.2.1 Consumer Index Price (CPI) Method
3.2.2 Problem In Measuring Cost Of Living 10-11
3.2.3 Effects Of CPI in Malaysia

3.3 The Number Of Population in Malaysia


3.3.1 Definition of Population
3.3.2 The Affects of Population Growth towards Living Cost 12
3.3.3 Statistic of Population Growth In Malaysia

CHAPTER FOUR : CONCLUSION


4.1 Conclusion
4.2 Suggestion On Lowering Cost of Living
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4.2.1 Government Role
4.2.2 Our Role
REFERENCES 14

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CHAPTER ONE : PROLOGUE
1.1 Introduction
Ever since money was introduced as a value to exchange goods, there are advantages as well
as disadvantages that can be seen from it. It is undeniable that money is important to every
individual. Money has so much power that it can even control society. In economy, money
flow happens when a penny is spent on products. Money flow goes from spending, receiving
wages to spending again. Money could also be the main factor standards are formed as well
as inequality.
1.2 Research Background
An analysis of the high cost of living problem by Clarkson, Grosvenor B.(1919)
The studies of this problem leads us to doubt that any investigation of the high cost of
living can accomplish important, immediate or lasting results unless the subject is probed to
its very foundations and remedial measures of far-reaching and thorough-going character are
adopted. The problem of the high cost of living is but one phase of the larger general problem
of readjustment under after-war conditions

WORK, WAGES, AND PROFITS THEIR INFLUENCE ON THE COST by H. L.


GANTT (1911)
a general increase of wages increases cost, if such a policy is followed, it will not be long
before a new increase of wages will be needed to meet the continually rising cost of living.
the combination of the high cost of living, and the inefficiency of production in almost all
lines

Low pay and the cost of living: A supply-side approach by RYAN BOURNE (2014)
The prices of many essentials such as housing, energy, childcare and food were rising
substantially even prior to the financial crisis. Price rises in these markets have a
disproportionate impact on those with low incomes. Policies which drive up costs in these
product markets might have been tolerable in an age of abundance, but are much more
difficult to justify given the recent living standards squeeze

1.3 Research Question


As we know the report is about Cost of living which has a lot of question to be answered but
in this research we are focusing on there main Question which is What Are the main factors
of Rising Cost Of Living?,How to measure the rising Cost of Living? and Why The
Population Affects the Cost of Living? these Question will bring an overall view on the rising
cost of living

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1.4 Research Objective
1.4.1 Identifying the Rising Cost of Living
There are many ways to identify rising cost living there are alot of factors play a major role
in it, 3 usually common factor are Rising food prices,Slow wage growth and Taxes. For
example Rising food prices there is a Report on Household Expenditure Survey 2016, the
Department of Statistics Malaysia (DOSM) revealed that food and non-alcoholic beverages
made up 18% of the main household consumption expenditure.According to the latest
Consumer Price Index (CPI), food and non-alcoholic beverages accounted for 30.2% in CPI
weights. Mean monthly salaries and wages also recorded an annual growth rate of 6.3% to
RM2,463 compared to RM2,312 in the previous year.
1.4.2 Measuring the cost of living
In Malaysia, the Consumer Price Index or CPI measures changes in the prices paid by
consumers for a basket of goods and services. This page provides the latest reported value for
- Malaysia Consumer Price Index (CPI) - plus previous releases, historical high and low,
short-term forecast and long-term prediction, economic calendar, survey consensus and news.
Malaysia Consumer Price Index (CPI) - actual data, historical chart and calendar of releases -
was last updated on November of 2018.

Actual Previous Highest Lowest Dates Unit Frequency

120.70 120.50 121.30 24.30 1972 - Index Monthly 2010=100,


2018 Points NSA

1.4.3 Managing the number of population


Population goal of 70 million has been recommended by the Honorable Prime Minister
Seri Dr. Mahathir Mohammad during his speech at the UMNO General Assembly in
September 1982. He said that Malaysia will be more successful with a population of 70
million.
This recommendation was subsequently described and presented once again by his speech in
the current study presents the Fourth Malaysia Plan Mid-Term on the 29th. March 1984.
Population expected to reach this goal within 115 to 120 year Total population of Malaysia is
still small and have large benefits if the population grew up in Malaysia in the planning
period. Compared with other countries
1.5 Importance of Research
As it turns out, much of the variation in cost of living across states can be attributed to one
costly phenomenon: government. This is evidenced by the statistical relationships that were
tested between cost of living and policy variables explored in The 50-State Small Business
Regulation Index, written by economist Wayne Winegarden and published by the Pacific
Research Institute in 2015

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CHAPTER TWO : THEORY
2.1 Theory
2.1.1 The Reason Rising Cost Of Living
Rising food prices
In its Report on Household Expenditure Survey 2016, the Department of Statistics Malaysia
(DOSM) revealed that food and non-alcoholic beverages made up 18% of the main
household consumption expenditure.According to the latest Consumer Price Index (CPI),
food and non-alcoholic beverages accounted for 30.2% in CPI weights. Overall, there was an
increase of 4.6% for Food and Non-Alcoholic Beverages category.

The increase by food sub-group index consisted of oils and fats (+39.6%), fish and seafood
(+8%), vegetables (+4.8%), and fruits (+3.9%). Even the Food Away From Home Index saw
a rise, with an increase of 5.1%.Slice it further and you’ll notice a sharp rise in many
essentials such as cooking oil (49.1%), choy sum (+13%) and Indian mackerel or ikan
kembung (+11%), among others. Even round cabbage saw an increase of 6.7%.

Slow wage growth

According to the DOSM, in its Salaries & Wages Survey Report 2016, the median monthly
salaries and wages received by paid employees improved by 6.2% to RM1,703 compared to
RM1,600 in 2015. Mean monthly salaries and wages also recorded an annual growth rate of
6.3% to RM2,463 compared to RM2,312 in the previous year.But Standard Chartered Global
Research observed that real wage growth was slightly negative during the first half of 2017.

One economist decided to gauge the effectiveness of BR1M by converting the annual payouts
to monthly amounts, to see how much of an impact it makes on the average monthly
household income.So in 2012 and 2016, the B40 households income averaged RM1,847 and
RM2,848, while BR1M payments for households earning below RM3,000 per month, were
RM42 and RM83 (RM500 and RM1,000 divided by 12).BR1M accounted for only 2.3% and
2.9% of household income of the B40, who are its principal recipients.

Towards a more equitable tax policy

The GST for example is regressive because it hits everyone through all layers of society, as
rightly pointed out by one of the speakers, Dr Muhammed Khalid of DM
Analytics.Malaysians who receive an inheritance are not taxed. For property flippers, the
Real Property Gains Tax (RPGT) is only up to five years for Malaysians. “Other countries tax
these on top of individual and corporate income tax,” he said.What was unveiled in Budget
2018, that 2% tax cut on income tax, does not serve to alleviate the burden of Malaysians as
everyone gets to benefit from it, given the country’s tiered tax structure.Until that is fine-
tuned, the average Malaysian has to keep calm, adjust his or her lifestyle and carry on.

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2.1.2 The Effect Rising Cost Of Living
Inflation is the effect rising cost of living. In everyday usage, the word “inflation” refers to
any increase in the price level.

Meanwhile, inflation and the living cost are both harmful in different ways. An increase in
the living cost will hurt household and make them poorer.The harm from inflation is more
subtle as it makes it harder to plan for the future and so it discourages savings and investment
and also erode the real value of cash and other assets that have fixed nominal values.
Because the rate of inflation typically becomes more variable, it increases uncertainty and
makes markets work less efficiently and slows economic growth.In the meantime, the effects
of inflation are the same for everyone, but changes in the living cost varies from place to
place and from person to person. If inflation shrinks the unit of account by 5%, then the real
values of anything will also fall by 5% . In contrast, the change in general prices of goods and
services will affect people’s cost of living differently.

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2.2 Literature Review

2.2.1 The Effect of Government Policy On Living Cost

Costly Local Policies.

Local land-use regulations can cost families even more than bad federal or state policies.

The city council has as much influence on a person’s cost of living as the federal government.
Local governments regulate housing, which is the largest expense for most families. In total,
Americans pay about $209 billion a year extra for housing due to overregulation of land use.
For the average household, the cost is $1,700 a year, but the cost is distributed very
unequally. Rural families and those living in less-regulated cities are unharmed. Those in
expensive metro areas are taken to the cleaners, frequently for over $5,000 per year.

Land-Use Regulation. Land-use regulation is not the only mistake that local governments
make, but it is certainly the most costly. In the past half-century, local governments have
internalized the harmful ideas that cities and suburbs ought to be “planned” by experts and
that new construction generally imposes a net cost on other residents.

As a result, zoning boards, planning boards, town councils, environmental review boards,
neighborhood commissions, historic preservation societies, and even concerned neighbors
routinely delay or block much potential construction in high-cost cities and suburbs.

Costly Federal Policies.

Federal policy mistakes are felt by families across the country.

CAFE Standards. Cars and trucks sold in the U.S. are subject to the Corporate Average Fuel
Economy (CAFE) standards, a set of Byzantine gas-mileage regulations. The recent round of
gas-mileage regulations added about 10 percent to the cost of vehicles, costing the average
household $448 per year. Given their high cost, CAFE standards remain one of the least
efficient means of controlling pollution.

Thanks to a 2009 regulatory change spearheaded by President Barack Obama, automakers


had to increase the fuel efficiency of their fleets by 9 miles per gallon over five years. Not
surprisingly, the automakers passed the costs along to car buyers.

Quality-adjusted new vehicle prices declined from 1997 to 2008. After bottoming out in the
recession, vehicle prices rose 9.5 percent in six years. If the pre-2008 trend had continued for
another seven years, prices would have been 14.8 percent lower in 2014 than they actually
were. The average new vehicle costs around $32,500 about $4,500 more than if the price
trend had continued.

Researchers anticipated the price increase in papers written before the changes took full
effect. This paper uses the median estimate from several models: the loss in consumer surplus
is $61 billion per year, which works out to $3,800 per new vehicle. Adding the assumption
that businesses pass on only 75 percent of their higher vehicle costs to consumers further
attenuates the estimate presented here.

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2.2.2 The Indices Differences Cost of Living in Malaysia Compare to Other Countries

Malaysia Australia Japan Indonesia Germany


CPI 120.70 113.50 102.00 134.20 112.40
Food 1.20% 1.60% 2.40% 4.36% 1.90%
Inflation
Inflation Rate 0.60% 1.90% 1.40% 3.16% 2.30%

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CHAPTER THREE:RESEARCH ANALYSIS

3.1 Rising Cost of Living in Malaysia.

3.1.1 Inflation

Inflation is a quantitative measure of the rate at which the average price level of a basket of
selected goods and services in an economy increases over a period of time. Inflation also
could be easily defined as the persistent increase in the average price level. Inflation
indicates a decrease in the purchasing power of a nation’s currency which will decreases the
amount of goods or services that able to be purchase by consumers. Measuring purchasing
power could be done by comparing the price of a good or service against a price index such
as the Consumer Price Index ( CPI ). As prices rises, it will start to impact the general cost of
living for the common public and the appropriate monetary authority of the country also.
Purchasing power affects every aspect of economics, from consumers buying goods to
investors and stock prices to a country’s economic prosperity. When a currency’s purchasing
power decreases due to excessive inflation, serious negative economic consequences arise,
including rising costs of goods and services contributing to a high cost of living.
Theoretically, when the cost of living increases, the purchasing power of the consumer will
eventually decreases. Inflation will reduce real income of an individual and it will become
more worst when the price of goods and services or the inflation rate are higher than the
increment of real income rate.

Malaysia’s average inflation rate amounted to an increment of 3.8% in 2017 compared to the
previous year. With the increment of inflation rate in 2017 based on 2016, this shows that the
price level in Malaysia has increased and making the cost of living of the consumer also
increase with the purchasing power decreasing.

3.1.2 Wage Growth

The income levels of Malaysians have increased significantly over the years. Malaysians on
average took back RM2,880 a month last year, an increase of 8.1% as compared to 2016.
According to data from the Statistics Department, the average monthly salary was RM2,657
in 2016, which was higher by 6.6% compared to 2015. In 2017, the median monthly salaries
and wages received by employees rose 7.7% per annum to RM2,160 last year from RM2,000
in 2016. According to the department’s chief statistician, Datuk Seri Dr Mohd Uzir Mahidin

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said the increase of mean monthly salaries and wages in 2017 was in line with Malaysia’s
economic performance.

Although the income levels of Malaysians have increased significantly over the years, the
purchasing power in Malaysia are still low. According to the Employees Job Happiness Index
2017 survey by JobStreet.com, one in three Malaysian employees want a pay rise, with
rewards constituting 52% of the domestic workforce’s motivation to work. In its 2017 Annual
Report, Bank Negara points out that the expenditure of the bottom 40% (B40) of Malaysian
households has expanded at a faster pace compared with their income. From 2014 to 2016,
the average B40 income level grew by 5.8% annually, marginally lower than the 6% growth
in the B40 household spending in the same period. It is also worth noting that half of working
Malaysians only earned less than the national median of RM1,703 in 2016.

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3.2 Measuring the Cost of Living.

3.2.1 Consumer Price Index ( CPI ).

Price level can be measure by constructing a price index. One major price index is the
Consumer Price Index ( CPI ). The CPI is based on a representative group of goods and
services, called the market basket, purchased by a typical household. The market basket
includes eight major categories of goods and services :

1) Food and beverages


2) Housing
3) Apparel
4) Transportation
5) Medical care
6) Recreation
7) Education and communication
8) Other goods and services
To calculate the CPI, first calculate the total cost expenditure on the market basket in two
years: the current year and the base year. The base year is a benchmark year that serves as a
basis of comparison for prices in other years.

The formula of Consumer Price Index :

𝑇𝑜𝑡𝑎𝑙 𝑟𝑖𝑛𝑔𝑔𝑖𝑡 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 𝑜𝑛 𝑡ℎ𝑒 𝑚𝑎𝑟𝑘𝑒𝑡 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟


𝐶𝑃𝐼 = ( ) × 100
𝑇𝑜𝑡𝑎𝑙 𝑟𝑖𝑛𝑔𝑔𝑖𝑡 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 𝑜𝑛 𝑡ℎ𝑒 𝑚𝑎𝑟𝑘𝑒𝑡 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟

Recall that the base year is a benchmark year that serves as a basis of comparison for prices
in other years. The CPI in the base year is 100.

CPI increased 0.6 per cent in October 2018 to 120.7 compared to 120.0 in corresponding
month of the preceding year. The increase in the overall index was due to higher price for
Housing, Water, Electricity, Gas & Other Fuels (+2.1 per cent), Food & Non-Alcoholic
Beverages (+1.2 per cent), Restaurants & Hotels (+1.2 per cent), Education (+1.1 per cent)
and Transport (+0.8 per cent). On a monthly basis, CPI increased 0.2 per cent as compared to
September 2018. CPI for the period January-October 2018 registered an increase of 1.1 per
cent as compared to the same period last year.

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3.2.2 Problems in Measuring Cost of Living

The goal of the Consumer Price Index is to measure changes in the cost of living. In other
words, the CPI tries to gauge how much incomes must rise to maintain a constant standard of
living. Despite the CPI being followed so relentlessly, the index is far from perfect as a
measure of either inflation or the cost of living, and it has a number of inherent weaknesses.

Firstly, the problem is that the CPI does not factor in substitution. The economic
reality is that when certain goods become significantly more expensive, many consumers find
less-expensive alternatives to them. Unable to take this common practice into account, the
CPI instead presents numbers assuming consumers are continuing to buy the same amount of
increasingly expensive goods. If a price index is computed assuming a fixed basket of goods,
it ignores the possibility of consumer substitution and, therefore, vertebrates the increase in
the cost of living from one year to the next.

Introduction of new goods also become one of the problem in measuring cost of
living. When a new good is introduced, consumers have more variety from which to choose,
and this in turn reduces the cost of maintaining the same level of economic well-being. As
new goods are introduced, consumers have more choices, and each ringgit is worth more yet
because the CPI is based on a fixed basket of goods and services, it does not reflect the
increase in the value of the ringgit that arises from the introduction of new goods.

Next, the problem with the CPI is unmeasured quality change. If the quality of a good
decreases from one year to the next, the value of a ringgit falls, even if the price of the good
stays the same, because you are getting a lesser good for the same amount of money.
Similarly, if the quality rises from one year to the next, the value of a ringgit rises.

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3.3 The Number Of Population in Malaysia.

3.3.1 Definition of Population.

Based on Merriam-Webster Dictionary, population can be defined as the whole number of


people or inhabitants in a country or region.

3.3.2 The Effects of Population Growth towards Living Cost.

Extreme growth in population or over population will somehow gives great impact towards
cost of living. Over population will increase the demand of supplies which will lead to
increase of the prices. These supplies could be related to food shelter and healthcare. And as
we mentioned since there will be a rise in unemployment people will suffer more with the
high cost of living.

3.3.3 Statistic of Population Growth In Malaysia.

Based on sources from Department of Statistics Malaysia (DSOM), the estimated population
of Malaysia in 2018 is 32.4 million as compared to 32.0 million in 2017 with an annual
population growth rate of 1.1 per cent.

Table 1 : Population size and annual population growth rate, Malaysia, 2010–2018

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CHAPTER FOUR : CONCLUSION
4.1 Conclusion
Malaysians are struggling to cope with rising cost of living in Malaysia that keeps rising
every year. As conclusion Identifying the Rising Cost of Living, Measuring the cost of living
and Managing the number of population plays a key role in cost of living hence why we
should pay attention towards it to obtain a sustainable and affordable cost of living in the near
future which should be the main goal

4.2 Suggestion
4.2.1 Government Role
Continue taking steps to help Malaysians, particularly the middle and low income groups to
cope with the escalating cost of living and minimise the impact on the people arising from the
increase in electricity and toll charges and assessment ratesThe Government should continue
its efforts to bolster the nation’s economy and provide the people with more and fairer
opportunities to secure a higher standard of living in line with the Government’s commitment
to become a high income nation.
4.2.2 Our Role
We also play an important role in lowering our cost of living such as conserving, utility bills
can be very expensive, particularly if you have a large home or a big family. Plan your
grocery trips we’ve all heard the tip, don’t go grocery shopping while you’re hungry.
Plus,save on child care children are cute, but let’s face it, they’re also expensive. Make it
yourself if you have the time and energy, you can make many items yourself that you would
normally purchase at the store. Finally,Stick to a budget saving money on everyday costs is
great, but unless you have a solid budget, you will still face many months where you are
overspending

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References
Internet
https://www.thestar.com.my/business/business-news/2018/05/09/average-wages-on-the-
rise/

https://www.thestar.com.my/business/business-news/2018/03/31/wages-too-low-says-
bank-negara/

https://www.statista.com/statistics/319033/inflation-rate-in-malaysia/

https://www.dosm.gov.my/v1/index.php?r=column/cthemeByCat&cat=106&bul_id=Vk
04a

TIvL0g4cUtieEV1a2RqTHVTQT09&menu_id=bThzTHQxN1ZqMVF6a2I4RkZoNDF
kQT09

http://www.colby.edu/economics/faculty/thtieten/ec476/Austin.pdf

Journals
Work, Wages and Profits Their Influnce On The Cost by H. L. GANTT (1911)

Low pay and the cost of living: A supply-side approach by RYAN BOURNE (2014)

An analysis of the high cost of living problem by Clarkson, Grosvenor B.(1919)

Andrew Kleit, “Impacts of Long-Run Increases in the Fuel Economy (CAFE)


Standard,” Economic Inquiry, Vol. 42, No. 2 (April 2004), pp. 279–294.

David Austin and Terry Dinan, “Clearing the Air: The Costs and Consequences of
Higher CAFE Standards and Increased Gasoline Taxes,” Journal of Environmental
Economics and Management, Vol. 50, No. 3 (November 2005), pp. 562–582,

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