Anyway for the past couple of years we have seen an increasing amount of ‘Bantuan Rakyat’ or “people’s aid” program dished out by our Government. This was part of our Government’s GTP (Government Transformation Program) to combat the rising cost of living. As a result the Rising Cost of Living NKRA was introduced as the seventh NKRA two years ago. To a layman these political manoeuvres or aid from the government cannot arrive at a better time when price of Goods and Services are skyrocketing. They come in many forms and acronyms such as BR1M (Bantuan Rakyat), BB1M (Bantuan Buku),KR1M (Kedai Rakyat), MR1M (Menu Rakyat) and etc.
Our question is will such schemes help reduce the cost of living among the Rakyat (populace)? Below we present to you the chart of Malaysia’s CPI as of April 2011.
As you can see from the above since the launched of our Government’s Rising Cost of Living NKRA in July 2011, the cost of living in Malaysia seems to be on the uptrend. In July 2011 the reading was at 103.2 CPI index points but as of March 2013 the CPI index point went up to 106.2 points. So you will be the judge on whether the lives of the people of Malaysia are better or worse off? Why is there a paradox? Financial aids from the Government are supposed to help lighten up the burden of the people by reducing the prices of things? We shall address this problem in the following.
Paradox of Rising Prices
The CPI is a measure of inflation that is most applicable to a layman. It is calculated from a basket of goods (necessities) from 26 different items in Malaysia. It is also one of the most watched economic indicators by policy makers. An overheated economy will call for a “tight money” regime where interest rates will be increased so as to reduce spending and hence prices of goods and services. To cut the story short, I now present to you Dr Irving Fisher’s equation on price theory or exchange which is,
Fisher Equation of Exchange
MV = PT where,
M = Money Supply
V = Velocity
P = Price
T = Transaction or GNP (Gross National Product)
So from our equation above where MV = PT.
MV can also be defined as the total amount of money multiplied by the velocity of the money which is equal to the total dollar expenditure for current production. In short we can also call it Aggregate Demand. Similarly PT represents the average price of current production multiplied by the total physical volume of current production or Aggregate Supply. As you can see from the algebraic equation MV = PT we can obtain the P by the following.
MV = PT
P = MV/T
As you can see the P can be influence by the three variables i.e, M,V and T
As you can see for P to increase either M or V will have to increase or T will have to reduce.
To put it in layman’s term, the following shows the cause and effect.
+M → +P or,
+V → +P or,
-T → +P
Since we know that the two rounds of RM 500 cash given out from BR1M scheme is an additional of new money into the system then it will help ↑M and hence the Prices of goods and services with V and T being constant. We also know that T or the GNP (currently produced goods and services) did not increased then it will not affect our P. So, now you can see that an increase in our country’s Money Supply will help to push prices up. The following chart is Malaysia’s Money Supply M3 which includes M0+M1+M2.
As you can see from above our money supply increased from 1,150,000 MYR Million in July 2011 to 1,400,000 MYR Million which represents a 21.7% increased since 2 years ago. So now you understand why cash hand-out by Government is not necessarily a good policy to alleviate poverty. It might provide a short term relief to the people but in the long term it will lead to inflation which will further burden the people.