Chapter 1 – Introduction

CHAPTER 1. INTRODUCTION

1.1 Definition of Economic

The term of ―Economics‖ was developed from the terminology from Greek (―Yunani‖)
known as oikos (house @ family) and nomos (law/regulation / rules).

Sinclair (1944) highlighted the definition made by Alfred Marshall who is Victorian
economist defined economy is about ‗man in the ordinary business of life‘ not about the
human behavior but about buyer and seller, producer and consumer, saver and investor,
employer and worker.

General definition of economy are about getting and spending of money, how to earn and
what sort of living they earn, how money affect the way of life and their outlook on life. It is
really so much not only about money but also something implied in the use of money such as
exchange, scarcity and choice. On the other hand, the general economy term represent the
following economist and scholars as a study of;

1. “..how society manages its scare resources”

2. “..human behaviour, with an emphasis on human decision making”

3. “..one of several science that tries to explain human behaviour, but differs in that
it emphasizes rational decision making”

4. “..how individuals and societies choose to use the scarce resources that nature
and previous generations have provided”

5. “..how individuals and societies choose to use the scarce resources that nature
and previous generations have provided”

6. “..how people choose to allocate scares goods and resources to achieve their
unlimited desires”

7. “..how people respond to incentives”

8. “..how to deal with the problem of scarcity”

9. “..how people use limited (scarce) resour”ces in order to satisfy their unlimited
wants.
10. “..of how individuals and societies choose to use the scarce resources that nature
and previous generations have provided.”

Therefore, economy can be referred to a study about money, banking and international trade,
wages and profits, production, consumption, standard of living, cost, and so on.

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1.2 Big Questions in Economic

Five main questions on economy are:

1. What? : What goods and services to produce and offers to market?

 Refers to type @ kind of product to produce
 Decisions must be made about what to produce due to limited
resources
2. How? : How to produce it? Either manually or conventional/traditionally or
technology oriented and production efficiency.
 Refers to quantity of goods @ services to be produced
 Depends on the demand from consumers or the population of the
country and resources available in the economy
 Refers to technique @ method of producing a product
 It can be capital intensive @ labor intensive or both
 Capital intensive means less number of labor used in the production
process
 Labor intensive means more labor used in the production process
3. When? : When to produce it? Seasonally and eventually or all the time available in
market for consumer basic needs?
4. Where? : Where is the best area and location to provide good in market? Urban area
or rural area? Developed nations or under development country and state?
5. Who? : Who will consume and being potentially seller and buyers? Who are also
want to be a producer and manufacturers of that goods and services
 Means who finally gets to enjoy the commodities produced

1.3 Economic Concept:

Resources are the things we use to produce goods. It is can be classified as generated by the
economist or heritage by previous generation of peoples. Goods and services are all the
things that we value and are willing to pay for.

In general practices of economy, the produces and users (consumers) need to make a chosen
of goods and services due to:

(a) Scarcity of resources: The condition in which resources or factors of production

available are not enough to meet all wants.

(b) Decision options/ Choice: A comparison of alternatives: compare costs and benefits for
each alternative

(c) Opportunities cost: What you give up in order to gain something. Opportunity cost is
the best alternative that we forgo, or give up, when we make a choice or a decision.
Nearly all decisions involve trade-offs.

Since the nature of resources are going to limited and scarce, choice must be made in how to
allocate them between society‘s competing wants and needs. Therefore, the decision made
by households, firms and government will be let go the loss of opportunity on the opted
goods and services. Opportunity Cost = Opportunity Lost.

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1.4 Productions
Production factors

In order to activate the economy, the production either goods (things or stuffs) or services
must be available. There a compulsory and necessity things need to be ready which know as
factors of production. The factors are:

a) Land and building : Natural resources provided by nature such as minerals, oil,
timber, air etc

b) Capital and Monetary : Stocks that can be used in the production process such as
office buildings, equipment and machine

c) Labors or Workers : Human effort in producing goods and services

d) Entrepreneurs (Business man): an individual or organisation who ho organizes the

other factors of production and who make decision on production. They enjoy the
profit and bear losses

Production Possibilities Curve

The Production Possibilities Curve (PPC) is a trend and pattern of option that show the basic
economic model which shows the tradeoff society or an individual‘s faces in how to use
scarce resources. PPC can be defined as a curve that shows the various possible combinations
of two goods that can be produced with the given fixed resources and stated technology.

The curve and applied law of PPC based on the assumptions of:
i. Only two goods
ii. Fixed resources
iii. Full utilization of resources (Full employment)
iv. Fixed technology

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Example 1: PPC for Cloth and Food:

Production
Food (unit) Clothes (unit)
Alternative

A 0 10
B 2 9
C 4 7
D 6 4
E 7 0

The above pattern of curve for PPC may infer following description:

a) Full employment: It is represents by any point located on PPC. Points A-E show the
full employment condition. These are the efficient points. Resources are fully
employed.

b) Unemployment: It is represents by any point located inside PPC. Point F shows the
unemployment condition. It is an inefficient point. The resources used is said to be
wasteful and goods produced is under capacity.

c) Scarcity: It is represents by any point located outside PPC. Point G shows the
scarcity condition. The amount of goods produced cannot be obtained due scarcity in
resources as well as constant in technology. It is unattainable point.

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d) Choice: It is represents by the movement among points on PPC. The movement from
B to C shows that the economies choose to produce more food.

e) Opportunity cost: It is represents by the slope of PPC.

Bowed-out shape PPC – increasing opp. cost
Bowed-in shape PPC – decreasing opp. cost
Straight-line PPC – constant opp. cost

Factors that Influence the Shift of PPC:

a) Economic Growth: The ability of an economy to produce greater levels of

output, represented by an outward shift of its production possibilities curves.

b) Situations of Advancement in Technology:

 Advancement technology for single product

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 Advancement technology for both product

c) Population: An increase in population will result in an increase in production.

On the other hand, if workers migrate to other countries , there will be a
reduction in population

Example 2: PPC for Work and PlayTime

PPC is important to analyze the concept of constrained choice and scarcity. The following
graph shows the resources of time to be used. Consumers may have to choose few hours of
time to work or play.

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Example 3: PPC for Smart phone and Bicyle:

Good "A" Smarphone 0 1 2 3 4 5

Good "B" Bicyle 16 15 13 10 6 0

20

15
Motorbike

10

0
1 2 3 4 5 6
Smartphone

Example 4: PPC for Television and Computer:

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1.5 Microeconomic

Microeconomics studies economic activities and decision making of a single individual like a
seller, buyer or consumer, household, firm or producer, and government.

The focus is on small economic units, such as economic decisions of particular groups of
consumers and businesses. Example: the demand and supply of cars in the market for cars in
Malaysia

Microeconomics is the branch of economics that examines the behaviour of individual

decision-making units—that is, business firms and households

1.5.1 Demand and Supply:

A. DEMAND:

i. Definition: of demand: – the ability and willingness to buy specific quantities of

goods in a given period of time at a particular price.

ii. Law of demand: – The higher the price of a product, the lower quantity demanded of
that product and vice versa.

P QDD P QDD
(a negative relationship exists between the price and quantity demanded)

Assumptions:
a. Tastes and preferences of consumers remain unchanged
b. Consumers income remains the same
c. Price of related goods (complement or substitutes) should remain unchanged
d. Goods should not have any prestige value

“ceteris peribus” : other factors remain unchanged

iii. Determinants of demand

a) Internal factors

1. Price of goods: Depends on cost the cost of production. Higher the price, lower
the demand
2. Service policies and terms of payment: Better customer service and terms of
payment by credit instead of cash will increase sales.
3. Profit margin: A higher profit margin will lead to an increase in the price of the
product and reduce its demand, vice versa

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b) External factors

1. Price of related goods: Affected by a change in the price related to goods.

 2 categories of related goods:
 Substitute goods
 Complementary goods

2. Consumer’s income: When income increase, demand will increase

a. Good increase in demand when income increase – normal goods
b. Goods decrease in demand when income increase – inferior goods

3. Tastes and fashions: When a product become more fashionable, demand will
increase significantly.

4. Population number of buyers: Larger population with high rate of growth creates a
greater demand

5. Expectation about future prices: The higher the expected future price, the higher
current demand for the product

6. Advertisements: Advertised goods normally have a higher demand because of the

awareness.

7. Festive season and climate: i.e. during CNY, demand for oranges will increase

8. Level of taxation: Higher the taxes, the lower the purchasing power of consumers

iv. Movement along the Demand Curve

Price

a
30

20 b

10 c

Quantity
5 10 15

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Any changes in quantity demanded by consumers will be a movement along the

demand curve from point of a, b and c. Occurs when price of product changes, but
other factors remain constant.

Upward movement - decrease in quantity demanded (contraction)

Downward movement - increase in quantity demanded (expansion)

v. Shifting of the Demand Curve

Price

30

b c
20

10

Do D1
Quantity
5 10 15

When the demand change, shifting in demand curve will occurs. It is happen when
there are changes in other factors such as population, income, price of related goods,
etc

The demand curve shifts to right if:

a) Price of substitute goods increases
b) Price of compliment goods decrease
c) Income increases (normal goods)
d) Expected future price increases
e) Number of buyers increase

On the other hand, the demand curve shifts to left if:

a) Price of substitute goods decrease
b) Price of compliment goods increases
c) Income decreases (normal goods)
d) Expected future price decreases
e) Number of buyers decrease

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B. SUPPLY:

i. Definition: of supply – Supply is defined as the ability and willingness to sell or

produce a particular product and service in a given period of time at particular
price

ii. Law of Supply – The higher the price of a product, the higher quantity supplied of
that products.

P QSS : P QSS
(a positive (direct) relationship exists between the price and quantity demanded)

iii. Determinants of supply

1. Price of related goods: Affected by a change in the price related to goods. 2

categories of related goods:
i. Substitute goods
ii. Complementary goods

2. Cost of production: When the cost f production increases, the quantity supplied
will decrease and vice versa

3. Expected future price: The higher the expected future price of product, the
smaller the current supply of the product and vice versa.

4. Technology advancement: New technologies that enable producers to use fewer

factors of production will lower the cost of production and increase supply

5. Number of sellers: The larger the number of firms supplying a product, the larger
the quantity supplied of the product and vice versa

6. Government policies: Taxes and Subsidies

7. Improvement in infrastructure: Improvement of transportation and

communication will facilitate free and fast movement of goods and services

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iv. Change in quantity supplied - Movement along the Supply Curve:

Price

30

a
20

Quantity
5 10 15

 Movement along the supply curve

 Occurs when price of product changes
 Other factors remain constant
 Upward movement-price of product rises, the quantity supplied increases
 Downward movement-price of a product falls, the quantity supplied decreases

v. Change in quantity supplied – Shifting of the Supply Curve:

S3

S1
Price
S2

30

b c
20

10

Quantity
5 10 15

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Shift in supply curve occurs when there are changes in other factors such as
technology, government policies, price of related goods, etc and the price of a product
remains constant.

Supply curve shift to right if:

a) Price of substitute goods decrease

b) Price of complementary goods increases
c) Price of input decreases
d) Increase in number of sellers
e) Government provides subsidy to sellers

Supply curve shift to left if:

a) Price of substitute goods increases

b) Price of complementary goods decreases
c) Price of input increases
d) Decrease in number of sellers
e) Government imposes tax to sellers

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1.5.2 Market Equilibrium

Definition : A market equilibrium is a situation when quantity demanded and quantity

supplied are equal and there is no tendency for price or quantity to change.

Relationship between
Market condition Market price
QD and QS

Equilibrium QD = QS Equilibrium

Shortage QD > QS Rise

Surplus QD < QS Fall

Shortage - where the quantity demanded is greater than the quantity supplied.

Surplus –where the quantity supplied is greater than the quantity demanded.

Price (RM)

SS
p2

p1

p0 DD

q0 q1 q2 Quantity (Nos)

The market equilibrium will change when there is a shift in the demand or supply curve.
3 situations:
 The demand curve shifts and supply remains constant
 The supply curve shifts and demand remain constant
 Both demand and supply curve shift simultaneously

 Increase in demand:

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Price

SS

4
E0
3
Shortage
D1

D0
Quantity
6 8

 Decrease in demand:

Price
Shortage

SS

Surplus E0
4
3

D0
D2
Quantity
6 8

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 Effect of changes supply: Increase in supply

Price

S0
E0 Surplus S1
3
2
DD

Quantity
6 8

Increase in supply

 Effect of changes supply: Decrease in supply:

Price
S2

S0
4 E0
3
Shortage

DD

Quantity
4 6

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1.5.3 Government intervention in the market:

a) Maximum price and minimum price:

 Ceiling price (Maximum price)
 Floor price (Minimum price)

Floor prices Ceiling price

Price are not allowed to fall. Also known Price is not allowed to rise . Also
as minimum price Surplus occurs known as maximum price Shortage
occurs
Advantages: Advantages:
 Protects producer‘s income  Consumer purchases products at a
 Higher wage rate lower price
Disadvantages: Disadvantages:
 Consumers pay more  Emergence of black market
 Waste of resources of production  Reduces quantity produced
 Creates unemployment  Producers tend to receive illegal
payments from consumers

b) Taxes and Subsidies:

 When the government imposes a tax on the sale of goods, the price of the goods might
rise by the same amount of tax imposed.
 The increase in the price of goods whether in full, or in part or none all depends on
the burden tax falls on the buyer or seller.
 Indirect tax is a tax that is imposed by the government on producers on producers or
sellers but paid by or passed on to the end-users. Indirect tax consists of import duties,
excise duties, service tax and export duties.
 A subsidy is an incentive fro the government to encourage producers or sellers to
produce more. Subsidy will lower the cost of production
 Subsidies by the Malaysian government are fertilizers, petrol, diesels, etc

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1.6 Macroeconomic

1.6.1 Definition

Macroeconomics is the branch of economics that studies the economic activities and
decision making of the economy as a whole and deals with economics aggregate. It
seeks to understand the big picture rather than the detailed individual choices.
Example: the national income, economic growth, inflation, unemployment, etc.

Macroeconomics is the branch of economics that examines the behavior of economic

aggregates— income, output, employment, and so on—on a national scale.

Microeconomics examines the behavior of individual decision-making units—

business firms and households.

Macroeconomics deals with the economy as a whole; it examines the behaviour of

economic aggregates such as aggregate income, consumption, investment, and the
overall level of prices

Macroeconomics is concerned with the study of the whole economy, and the effects
of changes in the international economy on a country.

Macroeconomics is the study of aggregate behavior of the entire economy that

includes gross domestic product (GDP), the national income (NI), inflation, deflation,
unemployment, public finance, the trade cycle, international trades and others.

1.6.2 Concern and Objectives of Macroeconomic

Three of the major concerns of macroeconomics are:

1. Inflation: an increase in the overall price level.

2. Output growth: The business cycle is the cycle of short-term ups and
downs in the economy. The main measure of how an economy is doing is
aggregate output:

3. Unemployment: The unemployment rate is the percentage of the labor

force that is unemployed. The unemployment rate is a key indicator of the
economy‘s health. The existence of unemployment seems to imply that the
aggregate labour market is not in equilibrium

Objectives of Macroeconomics: Macroeconomics goals and objectives are to achieve

the followings:

 Full employment: low unemployment and high productivity.

 Price stability: to keep inflation low and stable value of money.
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 Economic growth : to maximize output.

 Equilibrium in foreign sector:
 Equitable distribution of income: narrow the gap between the higher income
and the lower income groups
 Favorable balance of payment – increase exports sectors

Full employment:
o An economy should use all its available resources more efficiently to attain
maximum output
o The resources are based on the availability of factors of productions
o If more resources are employed, the higher the output of goods and services
o If the available resources are not being used, it shows there is unemployment
condition
o Unemployment rate is a percentage of the labour force who are out of
employment and who are seeking employment
o Full employment doesn‘t mean that 100 % of labour is employed (there is still be
a small % of unemployment)

Price Stability:

o Meaning that to keep inflation rate as low as possible

o What is inflation?
o Inflation can reduce the purchasing power of consumers
o The quantity of goods and services purchased will be less if inflation is high
o Inflation can also have several consequences

Economic Growth:

o In achieving economic growth, economy must be operating at optimum/maximum

capacity
o It shows that if full production output level is increase year by year so the
economic of a country is growing
o The economic growth of nation does not move constantly but will experience ups
and down (business cycle)
o Economic growth is also measured by evaluating the full production output per
capita
o If growth rate of output is greater than the growth rate of population, it shows an
increase in amount of output produced per person

Equitable Income Distribution:

o Try to narrow the gap between the higher income and the lower income group
o Distribution of income pictures the standard of living by people in one country
o Taxation is one method of achieving an equitable distribution of income
o An expenditure policy also can narrow the gaps between the two income groups

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Favorable balance of payment:

o To achieve equilibrium in the foreign sector
o A balance between the payments made overseas and receipts from the imports and
exports is important to ensure the stability in foreign sector
o Concept of deficit and surplus.

1.6.3 The Components of the Macroeconomy

There are three kinds of policy that the government has used to influence the
macroeconomy:

1. Fiscal policy refers to government policies concerning taxes and spending.

2. Monetary policy consists of tools used by the Federal Reserve to control the
quantity of money in the economy.

3. Growth policies are government policies that focus on stimulating aggregate

supply instead of aggregate demand.

Everyone‘s expenditure is someone else‘s receipt. Every transaction must have two sides.

1.6.1 The Macroeconomic Problems:

• The economic cycle growth path

• Recession: Recession (downswing), the level of economic activity is falling..
Characteristics:
• A decrease in the volume of output, trade and transactions
• An increase in the level of unemployment
• A reduction of aggregate income in terms of wages and profit
• A decline in consumption expenditure and investment level

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• Depression (trough):
• Depression is the very depth of the recession
• The overall level of economic activity will fall to the lowest level
• Unemployment rates will be higher
• The period of great suffering and hardship to society and worst phase of
economic cycle

1.6.2 Measuring National Income (NI):

Definition - Flow of goods of services in nation over a certain period of time. Concept of NI:
 Gross Domestic Product (GDP)
 Gross National Product (GNP)
 Market Price and Factor Cost
 Net National Product (NNP)
 Personal Income (PI)

Output are equal with aggregate income and expenditure. To Measure Gross Domestic
Product (GDP), approaches are:
 Expenditure
 Factor Incomes
 Output

Income National Income

Income is the money earn or paid as a
reward for the resources owned.
For example:
A worker earn income in the form
of monthly payment.
the total value of final outputs
which comprises of goods and
services produced by a country for a
particular period of time, usually a
year.
Tucker-defined national income as -
rents, wages, interest and profit.

Gross Domestic Product (GDP): The total of money value of all the final goods and
services produced within a country in a given time period. GDP excludes goods and services
produced by Malaysian citizen working oversea and intermediate goods The output produced
by foreign workers in Malaysia such as Indonesian or Nepalese will also included.

GDP = Gross Domestic Product, is the value of all final goods and services produced by all
sectors of the economy the citizens or foreign sectors within a country.

Gross National Product (GNP): The total market value of all final goods and services
produced by the residents of a country during given period of time. GNP excludes
intermediate goods. In other words, GNP is the total amount of income earned by nationals of
the country regardless where they are.

GNP = Gross National Product, is the value of all final goods and services produced by all
citizens of a country (within a country or abroad).
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1.6.3 Methods of Measuring National Income:

 Expenditure approach: It calculates from the expenditure side. It will be the

total of all expenditure made on the national output produced.

 Income approach: This approach is done by adding up all the total income
received by all economic agents for their contributions of factors of production of
national output

 Output/ Product approach: It calculate NI from the production or output view.

Thus, by using this approach, it will total up the value of all new output produced
in an economy.

1.6.4 Problem to Calculate National Income

 Practical Problems:
 Problems of illiteracy – related to difficulties in getting information especially
those related to underground economy
 Problem of expertise - shortage of professionals that will lead to human and
technical errors
 Lack of sophisticated machinery – technical equipment that are obsolete will
result in national income data become questionable

 Conceptual Problems:
 Arbitrary definition – inclusion or exclusion of certain items in NI accounting
will cause confusion
 Problems of depreciation estimation – different methods of calculating or
estimating depreciation
 Problems of double counting

1. Problems of non-monetized sector:

 Problems of a non-monetized sector usually arise in most Third World Countries like
India, Bangladesh, Myanmar, Cambodia, Vietnam and many African countries.
 The existence of a large number of non-monetized activities in these countries
especially in the agriculture sector makes the computation of the national income
more difficult.
 This is due to the fact that a large quantity of agricultural output in these countries
does not reach the market.
 It is either consumed directly by framers or exchanged for other goods and services.
 This will lead to difficulties in calculating the national income

2. Problems of expertise:
 The lack of professionals such as statisticians, researchers, programmers and analysts
is a major problem in third world countries.

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 The service of these professionals is very important in estimating national income

data accurately with minimum errors.

3. Problem of less sophisticated machinery:

 Another important difficulty is the non-availability of sophisticated machinery such as
advanced computers or programs to compute national income data.
 Data collected on national income regardless of which method is used, need to be
analyzed using sophisticated machinery.

4. Problem of false information:

 This problem arises in developed as well as developing countries.
 People do not disclose their income or underestimate their income to avoid paying
higher taxes.
 This will affect the calculation of the national income.

5. Problem of multi-occupation:
 Another difficulty in calculating national income is the problem of multi-occupations.
 People have been found to be engaged in a number of economic activities which are
not included in the national income.
 An example is that of a full-time employer in a company who earns a fixed income
and sells burgers at night.
 The income from the full-time job is included in the national income but the income
from the selling of burgers is not calculated in the national income.

1.6.5 Uses of National Income:

1. To measure the standard of living: national income data helps us compare the
standard of living in different countries
2. Economic performance overtime: the national income tell us whether the
economic performance of a nation is growing, stagnant or declining
3. National planning: important tool for the government to formulate its short term &
long term economic planning
4. Sectorial contributions: enable us to identify the important sectors that
contribute towards economic growth
5. Economic Policy: estimation of national income helps in formulate the future
economic policies
6. Inflationary & deflationary gaps: helps government implement anti-inflationary or
anti-deflationary gap

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1.6.6 Central and Commercial Banks

Insurance
companies

Unit trust Banks

Sources
Finance Building
companies society

Others

Biggest and most important group of deposit-taking organisations. 3 type of banks in

Malaysia:
 Central bank
 Commercial bank
 Merchant or investment bank
 Islamic bank

a) Central Bank of Malaysia / Bank Negara Malaysia (BNM)

Owned and controlled by the government:

Function:
 To issue currency and keep reserves safeguarding the value of the currency
 To act as a banker and financial adviser to the government
 To be a banker to other banks
 To promote monetary stability and financial structure
 Be a holder of the country‘s stock of gold and foreign currency exchange

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b) Commercial/Merchant Banks and Financial Institution

 Is an institution that is owned by the private sector and is profit-making institution. Earn
income from providing banking services i.e. opening current and savings accounts,
providing safe deposit boxes, remittance facilities, paying and collecting on payments by
cheque, etc. Earn most profit from loans and investments
 For example: AmBank Berhad, Public Bank Berhad, RHB Bank Berhad, Hong Leong
Bank Berhad, etc
 Functions:
o Accepting deposits
o Providing loans and services, i.e. overdrafts, long term loans, bridging finances
and performance bond.
o Enabling fund transfers from one place to another
o Facilitating foreign exchange transaction
o Providing advice for financial matters
o Providing ATM
o Providing safe deposit boxes
o Providing credit card facilities, insurance coverage, and long term savings

c) Merchant or Investment Bank:

• Do not accept deposit from public

• Expected to play the role of advisors and financiers to large companies
• The total development of project development finance is always high; financing from
single bank is impractical.
• Will act as financial managers by arranging loans with other institutions called ―loan
syndication‖
• A group of financiers will be formed to provide the loan collectively – to minimise
the risk of financing burden
• For example: Affin Investment Bank Berhad, Alliance Investment Bank Berhad,
CIMB Investment Bank Berhad, etc

d) Isamic Bank:

• The facilities and services basically similar to commercial banks but operations and
activities are based on Islamic practices and it promotes profit sharing
• For example: Bank Islam Malaysia Berhad, Bank Muamalat Malaysia Berhad, RHB
Islamic Bank

e) Building Society:

• Function – to accumulate funds through accepting deposits and issuing shares, and
using accumulated funds to finance housing loans through installments, usually for
long term which society holds mortgage on the property.

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© 2018 Mohd Rofdzi Abdullah
 Chapter 1 – Introduction

• Provides credit facilities i.e. long term loans, bridging finance, etc.
• Provides property leasing and construction project management
• Offers low interest rates for property loans.

f) Insurance Company:

• Financial institutions that provide compensation to the parties being insured with the
agreed amount of money in the event of ‗mishap‘, in return for a much smaller
amount of money (premium)
• Provide services i.e. granting of loans: mortgage loans, hire-purchase loans
• Provide development finance with interest rate as high as Merchant Banks
• Only AIA Insurance and ING Insurance provides loans (long term) for construction
industry

g) Finance Company:

• Used to be popular for construction but no longer existed.

• Raise funds via bank loans and partly accepting deposits of which interest charge was
generally higher than commercial banks.
• Offered loans for financing like hire-purchase, mortgage, factoring, housing loans and
other short and medium term loans

h) Others Sources of Financing:

• Trust funds, pension funds, Employee Provident Fund (EPF)

• May not provide high margin but they are able to assist borrower in settling property
purchasing loan

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© 2018 Mohd Rofdzi Abdullah

Commercial Banks:
Accepting deposits
This is the most important function
because banks depend on such deposits
from customers in the form of current or
demand deposits, savings deposits from
customers in the form of current or
demand deposits, savings deposits and
fixed deposits.
Providing loans and advances
Commercial banks give loans such as
housing loans, car loans, education
loans, business loans, personal loans
and other types of loans to the public and
earn profits by imposing an interest. The
loans are given in the form of direct
loans, overdrafts and discounting bills of
exchange
Providing other banking Commercial
banks also provide other banking
services and facilities as below including
internet banking:
a) Facilitating foreign exchange transaction
b) Issuing bank drafts, cheques and
traveller‘s cheques
c) Purchasing or selling stock exchange
securities
d) Enabling fund transfers from one place to
another
e) Providing Automated Teller Machines
(ATM)
f) Facilitating bill payments such as
Telekom, Astro and TNB bills on behalf
of customers
g) Providing safe deposit boxes for the safe
keeping of valuable items and
documents.
© 2018 Mohd Rofdzi Abdullah
Chapter 1 – Introduction
Central Bank:
To issue currency and keep reserves
safeguarding the value of the currency
Printing of paper currency is one of the
most important functions of a central
bank. BNM in the only financial institution
with the authority to issue currency.
To act as a banker and financial adviser
to the government
Central banks in all countries act as the
banker and financial adviser to the
government‘s on all important financial
matters of their countries. BNM keeps the
government‘s principal bank accounts,
receives taxes and other revenues and
makes payment in respect of government
expenditure. The BNM also manages the
national debts, sells bonds and redeems
matured treasury bills.
To be a banker to other banks
As the bankers‟ bank, the central bank
performs several functions. It keeps cash
reserves of commercial banks in the
economy and thus acts as the custodian
of the reserves country which supports its
credit and banking system. The other
banks keep their deposits with the central
bank. The central bank also acts as the
lender of the last resort.
To promote monetary stability and a
financial structure
The central bank is responsible for
achieving a high level of employment,
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h) Providing credit card facilities, insurance
coverage and long-term savings
© 2018 Mohd Rofdzi Abdullah
Chapter 1 – Introduction
maintaining price stability and a
reasonable balance with regard to the
country‟s international payments,
eradicating poverty and restructuring
society. The central bank uses
quantitative and qualitative measures to
ensure monetary stability.
Be a holder of the country‟s stock of gold
and foreign currency reserves
The central bank manages the country‟s
foreign exchange reserves, implements
the government exchange rate and the
balance of payment policy
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