Malaysian Economics: The shock of exchange rate in ASEAN can influence macroeconomic indicators during AFC.

9. Discuss on how the shock of exchange rate in ASEAN can influence macroeconomic indicators during Asian Financial Crisis.

    Asian Financial Crisis that happened in 1997 has had a great impact on most of the Asian countries.  One of the impacts was the shock of exchange rate in ASEAN which influenced macroeconomic indicators. There are six macroeconomic indicators which are Gross National Product (GNP), inflation rate, unemployment rate, economic growth rate, interest rate, trade account, and current account. 

    Firstly, the shock of exchange rate may influence the sectors of import and export. The shock of exchange rate refers to the situation when the value of one currency soars against another currency in a very short period of time.  Also, it may affect inflation through direct and indirect ways. For example, suppose the Malaysia currency decreases, and the US Dollar increases relatively. It will directly cause the price of imports of goods from abroad (US) will also increase. The lower exchange rate of Malaysia or other ASEAN countries makes it easier for export goods from ASEAN countries to be exported abroad as the low exchange rate causes the demand for export goods from ASEAN to increase. In addition, commodities such as rubber are also calculated in dollars. Therefore, any shocks of domestic rate will jeopardize the commodity market. If the US dollar become stronger, commodity prices will be relatively more expensive for ASEAN countries that have weak currency exchange rates to buy commodities. However, for a country that produce commodity like Malaysia, this will make its GNP a positive value because factor income from abroad is greater than income from abroad.  In the trade account, this situation may cause surplus in trade balance, in which it means the value of imports is lesser than the value of exports.

    Next, rate shocks may influence the unemployment rate indirectly. The Philips curve describes the relationship between inflation and unemployment.  The curve states that if inflation falls, unemployment will rise. However, according to the Philips curve, if inflation goes up due to higher competitiveness, higher unemployment should not happen.

    To conclude, if there was a shock of exchange rate, it will give a direct impact to inflation, interest rates, trade and many more. 
































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