The Differences Between The Islamic Macroeconomics and Conventional Macroeconomics in The

principles of Economics
The most pressing issue for an economy designed to be handled on Islamic principles would be how
to reconstruct the financial and monetary system in the economy not only to guarantee that it
complies to Islamic principles but also that it is favorable to the aims of an Islamic economy. So,
basically here, I want to explains the Islamic Macroeconomics objectives.
a) Islamic macroeconomics

i. Maximization of employment generation

Employment is an activity which one engages in epecially in earning one’ living (Merriam-
Webster, April 2022). According to the Islamic macroeconomic view, maximizing
employment opportunities is the main goal. This statement implies that the Islamic
economy must emphasize that economic growth can contribute as much as possible to
the creation of new jobs. Another goal of this content is to not use all labor that depends
on economic efficiency. In the long run, additional jobs must be generated technically
efficiently using appropriate technology, in line with the existing supply of resources.
Ensuring adequate employment also requires the provision of educational and training
opportunities in specific fields.

Example of employment data in Malaysia:

Source : Department of Statistic Malaysia Official Portal, 2021

Unemployment refers to the number of people of working age who are actively looking
for work but are unable to find a job that suits them. There are three types of
unemployment; frictional, structural, cylical. Frictional is a type of temporary
unemployment that occurs when workers leave their current jobs and look for new ones.
This can be due to a change in employment within the same locality or to a move from
one locality to another. Secondly, structural unemployment This is a job created as a
result of industrial reorganisation, which is usually caused by technological change rather
than fluctuations in demand or supply and also can be the result of competition and
government policies. Cylical unemployments Cyclical unemployment, also known as
demand-deficient unemployment, occurs as a result of the business cycle's ups and
downs.

Example of unemployment data in Malaysia:

Source : Department of Statistic Malaysia Official Portal, 2021

ii. Social justice

Social justice is also an emphasis in Islamic macroeconomics. Social justice is a concept

that considers fair and equitable relationships between individuals and society. This is
measured in terms of the hidden and obvious conditions on the distribution of wealth,
the ability to engage in private activities, and community privileges. (Wikipedia, 2008)
This justice imposes rights and responsibilities on the community, enabling the public to
accept the benefits and disadvantages of community cooperation. These include taxes,
insurance, health, education and public services; labor laws, as well as market controls,
to ensure equitable distribution of wealth and equal opportunity.

Social justice seeks spiritual protection and human happiness. It is founded on the
principle that God is the sole owner of all existence in the universe. This award was given
to man, the caliph of Allah on earth. As a result, he must use whatever is bestowed on
him as a trustee rather than as an absolute owner.

Thus, no one can be the rightful owner of something acquired by committing behaviors
that are detrimental to society as a whole (Kuran, 1995). Therefore, “cooperative power”
rather than “opposite” should be applied to achieve balance in various sectors.
Cooperation is the right spirit in Islam for a satisfactory transaction of a commodity or
service. This may be achieved through the organization of cooperative companies,
cooperative buying and selling, or even conventional private buying and selling with the
idea of cooperation guiding buyers and sellers.

Islam forbids excessive and unbalanced accumulation of wealth, as well as its ownership
in the hands of a handful of people, and encourages public ownership and administration
of utilities in the fullest sense. On the other hand, a free market economy supports
private monopoly businesses to exercise unprofitable domination. The spirit of the
Prophet Muhammad’s faith requires that all extractive sectors associated with water,
mining, and even food production be recognized as state enterprises under an equitable
legal and regulatory framework. Furthermore, all types of fuels, both residential and
industrial, should not be allowed in the hands of private enterprises. As a result, the
energy industry, for example, is vast, as it currently exists in many parts of the Islamic
world, such as the Arabian Gulf countries.

iii. Economic growth rate that is optimal

Economic growth is traditionally measured in terms of the growth rate of the gross
domestic product, which is defined as the market value of all finished goods and services
produced within an economy during a year. GDP can also be considered the sum of the
value added in the production of all goods and services in a country during a year (ISRA,
2018).

Optimal economic growth in Islam encompasses all aspects, including the moral,
spiritual, and material aspects of human life. Human capital and material capital are the
two components of capital formation. Humans are the executors of all economic
activities. Since education is considered an investment, this factor should influence the
amount of investment. Economic development according to Islam must be guided on the
right track and in the right direction. Mankind is encouraged by Islam to seek halal
sustenance in order to survive. Islam also seeks to eradicate poverty through various
means such as zakat and group assistance

In contrast to Sufis, most Islamic authors emphasize economic success in Islamic rule for
human well -being in this world and the hereafter. Excess wealth (or economic
development) is that it enables a person to live a good Islamic life by performing all
Islamic obligations such as hajj, jihad, zakat (Ibn al to national strength, stability, and
national defense (alTartusi. Al— Qayyim).), and it brings Tartusi to show the phenomena
that the contemporary world is facing; economic slowdown leads to political instability,
weak national defense, political dominance of the economy. AlTartusi's intellectual mind
was able to clearly understand this phenomenon and in turn encourage Muslims to
achieve economic success while adhering to Islamic values.

Ibn al-Qayyim placed a high value on agricultural development. Because there are those
who have property but do not or cannot cultivate it, and there are those who are
capable and eager to cultivate land but do not own it. Ibn al Qayyim was in favor of the
management of stock cultivation in the agricultural sector. It is fair, he believes, for some
parties to supply land while others cultivate it, and for them to share the revenue on an
agreed basis. However, whether the planting of the shares is valid or not is a matter of
dispute among the fuqaha. According to modern third world economists, stock
cultivation is not a good land use arrangement in the agricultural sector.

Ibn Taymiyyah emphasized that every person must have a basic standard of living in
order to perform his duties to his family, fellow citizens, and the Creator. He gave
religious legitimacy to economic activities that contribute to economic progress by
arguing that the agricultural, industrial, and commercial operations necessary to meet
basic human needs are fardu kifayah. One of its most notable economic achievements
was the emphasis on the government’s obligation to ensure that everyone’s basic needs
are met.

iv. Equitable distribution of income

Economic equity refers to how their prosperity in market segments of the economy is
shared in the economy and how the least privileged members of society's basic needs
are met (ISRA, 2018). However, from an Islamic standpoint, implementing the Islamic
system of organising economic activities would result in better income distribution. It
would ensure equitable distribution, reliance on two distinct sets of controls; a set of
ethical and regulatory safeguards to prevent the emergence of inequalities, a set of
corrective measures that the state would implement if inequities arose. Although Islam
insists on a powerful built-in income redistribution mechanism, some income inequality
is permitted because it promotes individual initiative.
In Islam, social justice is based on faith. A believer is automatically obligated to do
justice. Also for the redistribution of income, whether voluntary or compulsory, is not
only an economic necessity, but also a necessity of moral values. However, it is also a
means of spiritual protection. This is based on maximizing human happiness. In Islam,
happiness comes from the state of mind and not the possession of property. Moreover,
it requires gratitude and satisfaction. In Islam there is zakat, alms, hibah and wakaf.
The promise of equal pay and living standards in the community is fundamentally
appealing, especially to people who lack highly marketable and searchable talent, access
to quality education, and appropriate situations. The argument that every individual, as a
 human being, should have equal rights and a comparable standard of living seems
convincing.

Journal Article Islamic Macroeconomics Analysis

Islamic Economic Development : Based on this journal, I

Economics I. Ibn al-Qayyim found the economic
System : From II. Ibn Tamiyyah growth by scholars in
Principle to III. Shah Wali Allah Islam.
Microeconomics
and
Macroeconomics
Fields (2009)
Equitable
Distribution of Wage Differentials or Discrimination: Islamic I knew that the wage
Income with Perspective differences among public
Growth in an caused by some factors.
Islamic Economy
(2016)

An Islamic Society, Economy and State. I got that Islam opposes

Perspective on the excessive and
Economic and disproportionate growth
Social Justice of wealth, as well as its
(2016) concentration in the
hands of a few, and
promotes public
ownership and
administration of utilities
in the fullest sense.
Education of Islamic Education should highliting on: This journal explains the
Islamic Economics: I. Teaching methodology development of Islamic
An Overview II. Education reforms Education and the
(2015) III. Educational Program for parents addition solution.
 Book Islamic Macroeconomics Analysis
Islamic 1. Employment I found that
Economics 2. Unemployment unemployment has 3
Principles &  frictional types ;frictional,
Analysis (2018)  structural structural, cylical and also
 cylical how these types influence
the economy.

The most pressing issue for an economy designed to be handled on Islamic principles would be how
to reconstruct the financial and monetary system in the economy not only to guarantee that it
complies to Islamic principles but also that it is favorable to the aims of conventional economy. So,
basically here, I want to explains the Conventional Macroeconomics objectives.

b) Conventional macroeconomics

i. To achieve full employment

Conventional macroeconomics argues, full employment is defined as the use of all

available factors of production with an unemployment rate of less than 4%. (Sabariah Ali,
2019). When full employment occurs, economic activity rises as national output rises,
resulting in increased economic growth. As a result, national income will rise and the
poverty problem will diminish. This does not imply that there are no unemployed or
jobless people in the economy; rather, it refers to the level of employment where there
is no cyclical or involuntary unemployment. It is difficult to believe that full employment
means that 100% of the labour force is employed. Some people are unemployed because
they are transitioning to new jobs and chose to resign (temporarily unemployed), or they
are looking for a new job.

The potential benefits of full employment in the economy include the efficient use of
available resources. More output can be produced if more resources are used. An
increase in output can result in an increase in economic growth. Unemployment, on the
other hand, is the inverse of this. Theoretically, if full employment cannot be achieved at
100%, it is impossible to achieve a 0%unemployment rate. The most serious economic
consequences of unemployment are wastage of resources and social problems.

To succeed in this task, sustainable development strategies must include a strong

division of employment aimed at increasing the productivity of the poorest workers
while ensuring that they maintain the majority of their increasing income power by
gradually strengthening labor market institutions. Focusing on good jobs is important in
the near term to reduce the catastrophic effects of the prolonged employment crisis and
in the long run to make economic development more sustainable, inclusive and
egalitarian. Macroeconomic, environmental and industrial policies that promote
structural change, investment and job creation, as well as strong social and labor market
regulation, are all components of employment -focused development plans.

A collection of integrated macroeconomic, trade and labor market policies that all have
an impact on wages and employment conditions will be needed to achieve structural
changes in favor of the poor. Increased trade creates opportunities for job development
if farmers and domestic enterprises can thrive well, engage in the global value chain and
increase their labor demand. However, more trade openness may result in an
adjustment process that disrupts trade management. In certain situations, the rapid
liberalization of trade and financial markets, together with tight macroeconomic policies,
has contributed to wage pressures in the formal sector, resulting in increased
employment patterns rather than reduced informal employment. However, policy
decisions are equally important. In certain countries, low inflation and labor market
flexibility have taken precedence over job growth and fair working conditions.

Good and productive work contributes to wider social development and has a positive
impact on other aspects of life. Decent work, under conditions of freedom, justice,
security, and human dignity, is fundamental to people’s lives and an essential
component in their sense of identity and social connection. Evidence shows that as labor
is increasingly respected in terms of earned wages, public concern about corruption and
interest in democratic government is growing. They are also more willing to invest in the
health and education of their children and themselves. Working wage earners were
about twice as likely than unemployed wage earners to report having general trust in the
public. They also showed a much higher propensity for the participation of civic values.

ii. To achieve price stability

Compared to price stability in terms of Inflation, or an increase in the general price level,
poses a challenge to every country. Inflation is defined as a continuous and unending
increase in the general price level of goods and services (Sabariah Ali, 2019). High
inflation rates associated with continuous increases in general price levels can wreak
havoc on the economy.
Therefore, there are several benefits of price stability. For starters, price stability makes
it easier for individuals to recognize changes in the price of a stated product in terms of
other items because such changes are not obscured by variations in the total price level.
Suppose, for example, the price of a particular product increases by 3%. If the overall
price level remains unchanged, the buyer will be aware that the relative price of this
product has increased and may choose to purchase a lesser quantity of it. However, if
inflation is significant and volatile, it is more difficult to determine relative prices, which
may have fallen. In the event of widespread deflation, customers may not realize that a
decline in the price level of a particular product only reflects the overall price trend,
rather than a decline in the relative price level of this commodity. As a result, individuals
can purchase excessive amounts of these items.
Further, if creditors are confident that prices will remain stable in the future, they will
not demand additional returns (referred to as “inflation risk premiums”) to offset them
for the inflation risks associated with owning nominal assets in the long run. Price
stability will increase the efficiency of the capital market in allocating resources and in
turn increase incentives to invest by lowering such risks and resulting in lower nominal
interest rates. This, again, encourages job creation and, more broadly, economic well -
being.
Third, reliable price stability reduces the likelihood that people and enterprises will
divert their resources from productive uses to protect themselves from inflation or
deflation, such as by indexing nominal contracts to price movements. Since full indexing
is either impossible or very expensive, there is an incentive in a high -inflation
environment to hoard real goods, which retain their value better than certain money or
financial assets. Excessive product hoarding, on the other hand, is clearly not an effective
investment option and restricts real economic growth and income.
Fourth, the implementation of taxation and social welfare can generate incentives that
distort economic behavior. In many situations, this distortion is compounded by inflation
or deflation, as the fiscal system typically does not allow for the indexation of tax rates
and social security payments to inflation rates. Wage increases, for example, intended to
compensate workers for changes in inflation can result in workers being exposed to
higher tax rates, a situation known as "cold growth." Price stability reduces the distorted
effects of inflation or deflationary trends on taxes and social systems.

iii. To achieve economic growth

Economic growth can be defined as an increase in national income calculated as a
percentage increase from the previous period to the current period. A country that has
experienced economic growth will have a positive economic performance. This
demonstrates that the economic environment is productive not only in terms of output
and income growth, but also in terms of labour productivity. However, an economy will
not always experience an upward trend over time because economies experience short-
term ups and downs in performance. This is referred to as a business cycle. A business
cycle depicts a series of economic expansion and contraction cycles; it is the periodic and
irregular up-and-down movements in an economic activity. It has four stages: trough,
expansion, peak, and recession.
Economic progress does not often produce widely shared benefits. Policy choices are
important: despite rapid growth in many economies, severe poverty has persisted, while
some poorer countries and slower growth have been very effective in eradicating severe
poverty and social misery. The very equitable distribution of income and wealth in the
various “tiger” countries of Asia, as well as in the Nordic countries before them,
illustrates that equality is associated with outstanding economic success in the long run.
High levels of inequality in other countries, on the other hand, have been linked to
fluctuating economic performance.
Furthermore, the relationship between inequality and growth is numerous and very
complex. Larger admissions are dependent on factors such as income distribution, job
creation, and gender aspects, among others. In terms of gender, there is a strong link
between socioeconomic progress and women’s empowerment. Economic policies,
particularly those aimed at fostering market integration, have different effects on men
and women, and development strategies should aim to promote gender and other forms
of equality, not only to improve social welfare and facilitate the realization of human
potential, but also to enhance basic economic performance.
Moreover, in terms of social sector spending, public investment in education, training
and health programs allows the government to directly address many of the
characteristics of poverty and marginalization. Investment in social services can also
increase aggregate demand, which is “according to many” private investment. Cash
transfers can help vulnerable populations such as single parents, children, the elderly,
and those with disabilities or chronic illnesses who may have few other options for
income.To achieve an equitable distribution of income. A country's economic success
cannot be determined solely by the rate of its economic growth. It is necessary to ensure
that a country's economic growth is distributed fairly among its citizens. Income
inequality is a major issue for policymakers to address, especially in multiracial countries
like Malaysia, Singapore, Australia, and the United States. In general, policymakers strive
to ensure that there is not a large disparity between the rich and the poor. Policymakers
will devise an income redistribution policy to close the income gap between the upper
and lower income groups. This is done to ensure that everyone has an equal standard of
living. Income disparities will cause social friction and a slew of problems.
 Figure 1: Technological Progress and Skill Premium in OECD Countries
Source : Causes and Consequences of Income Inequality: A Global Perspective
A few factors driving higher income inequality listed. New information technology has
resulted in significant increases in productivity and well-being, but it has also played a
key role in pushing up the skill premium, resulting in rising labor income inequality
(Figure 15). This is because technology advancements can disproportionately increase
the demand for capital and skilled labor over low-skilled and unskilled labor by
automating numerous occupations or raising the skill level necessary to obtain or retain
those employment. Indeed, technical advancements have been determined to be the
most significant contributor to growing income inequality in OECD nations, accounting
for over a third of the widening gap between the 90th and 10th percentile incomes
during the previous 25 years. Despite a significant increase in the availability of highly
educated labor, evidence from bigger emerging market countries reveals a similar
pattern of a widening pay disparity between high- and low-skilled workers (which should
reduce the gap).
Next, globalization of finance. Financial globalization has the potential to improve
effective worldwide capital allocation and encourage international risk sharing.
Simultaneously, rising financial flows, notably FDI and portfolio flows, have been proven
to enhance income inequality in both advanced and developing market nations. One
possible explanation is that foreign assets and liabilities are concentrated in
comparatively higher skill- and technology-intensive industries, which drives up demand
for and compensation for highly skilled people. Furthermore, FDI may result in skill-
specific technology development, skill-specific pay negotiating, and more training for
skilled employees than unskilled people. Furthermore, low-skilled outbound FDI from
advanced economies may be disguised as comparatively high-skilled inbound FDI in
developing economies, aggravating the need for high-skilled personnel in recipient
nations. Financial deregulation and globalization have also been mentioned as factors
driving the rise in financial wealth, relative skill intensity, and earnings in the finance
industry, which is one of the fastest expanding industries in advanced nations.
Lastly, education factor. Education may play a crucial role in decreasing economic
disparity since it impacts occupational choice, access to employment, and pay level, and
it also serves as a signal of aptitude and productivity in the labor market. According to
the human capital model of income distribution while there is an unambiguously positive
relationship between educational attainment and income inequality, the effect of
increased educational attainment on income inequality could be either positive or
negative depending on the evolution of rates of return to education (that is, the skill
premium). Moreover, there can be opposing forces at play stemming from
“composition” (that is, increasing the share of high-wage earners) and “wage
compression” (that is, decline in the returns to higher education relative to lower levels)
effects. Overall, the evidence suggests that the inequality impact of education depends
on various factors, such as the size of education investments by individuals and
governments and the rate of return on these investments. It is in this spirit that Rajan
(2015) notes that “prosperity seems increasingly unreachable for many, because a good
education, which seems to be today’s passport to riches, is unaffordable for many in the
middle class.”

iv. To achieve equilibrium in the foreign sector

The term "foreign sector" refers to economic transactions or activities that take place
outside of a country's political boundaries. It includes transactions such as imports and
exports, foreign investments, and inter-country tourism. A country will strive for an
overall balance of payments (BOP) surplus, which indicates a greater inflow of money
than an outflow of money. If a country has a BOP deficit, it will have to borrow from
other countries, which will result in high debt problems, whereas a prolonged BOP
surplus will result in inflation. As a result, it is critical for a country to understand and
determine the favourable scale of its BOP.
Exports are goods and services that are produced domestically and sold abroad. Imports
are goods and services that are produced abroad and sold domestically. Then, net
exports (NX) are the value of a nation’s exports minus the value of its imports. Gross
Domestic Product (GDP) is calculated as consumer spending plus government spending
plus business investment plus the sum of exports minus imports. It is represented as
GDP = C + G + I + (X – M). If firms elected to produce less, household spending would
fall, resulting in a drop in GDP. Alternatively, if families elected to spend less, it would
lead to a decline in company production, resulting in a decrease in GDP.
 GDP is frequently used to gauge an economy's financial health. A recession is defined as
two consecutive quarters of decreasing GDP. When this occurs, governments and central
banks modify fiscal and monetary policy in order to stimulate growth. For example, if a
central bank feels that spending contributes to economic growth, it may lower interest
rates, making money cheaper, so that people will buy more commodities, such as houses
and vehicles, boosting overall expenditure. As consumer spending rises, businesses boost
output and hire more people to match the demand. Increased employment equals
higher income and, as a result, more people spending in the economy, causing producers
to raise output once again, perpetuating the cycle.

Journal Article Conventional Economics Analysis

Macroeconomic stability, i) Inclusive Growth These two objectives was

inclusive growth and
employment (2015)
Price Stability : Why Is It
Important for You?
ii) Employment and decent explained in case to
jobs develop more advantages
to the country
expenditure.
i) Advantages of price These four advantages
stability: price stability can attract
1. Price stability makes it foreign investment to
easier for people to invest domestically
identify changes in the
prices of goods
expressed in terms of
other goods
2. If creditors can be sure
that prices will remain
stable in the future,
they will not demand
an extra return to
 compensate them for
the inflation risks
associated with holding
nominal assets over
the longer term
3. The credible
maintenance of price
stability also makes it
less likely that
individuals and firms
will divert resources
from productive uses in
order to protect
themselves.
4. Tax and welfare
systems can create
incentives which
distort economic
behaviour
Causes and Factors Driving Higher Income These three factors
Consequences of Income Inequality : influenced higher income
Inequality: A Global
i) Technological change. inequality and give good
Perspective. (2015)
ii) Financial globalization. impression to economy.
iii) Education.

References
1. Book
 Adam Abdullah, … (2018). Islamic Economics Principles & Analysis. International Shari’ah
Research Academy of Islamic Finance.

2. Online source

Dr. Razia Khatun. (2015). Economic Education : Islamic Perspectives.

http://oaji.net/pdf.html?n=2015/1115-1438667496.pdf

Era Dabla-Norris, Kalpana Kochhar, Nujin Suphaphiphat, Frantisek Ricka, Evridiki Tsounta.
(2015). Causes and Consequences of Income Inequality: A Global Perspective.
https://www.imf.org/external/pubs/ft/sdn/2015/sdn1513.pdf

European Central Bank.(2009). Price Stability : Why Is It Important for You?, Eurosystem.
https://www.ecb.europa.eu/pub/pdf/other/whypricestability_en.pdf

Randeree,K. (2016). An Islamic Perspective on Economic and Social Justice.CURVE.

https://pureportal.coventry.ac.uk/files/4052424/Islamic%20COMB.pdf

Salman Ahmed Shaikh (2016). Equitable Distribution of Income with Growth in an Islamic
Economy.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2713268

Thematic Think Piece.(2015). Macroeconomic Stability, inclusive growth and employment,

UN System Task Team on The Post-2015 UN Development Agenda.
https://www.un.org/millenniumgoals/pdf/Think%20Pieces/12_macroeconomics.pdf

3. Links

http://www.ukm.my/hairun/Ecn3100/open%20macroeconomics.pdf
https://www.investopedia.com/terms/circular-flow-of-income.asp

My New Vocabulary

No. Vocab Explaination/Synonym Word

 1 contributes give (something, especially money) in order to help
achieve or provide something/donate
2 Endowment the action of endowing something or someone.
3 Frictional of or produced by the action of one surface or object
rubbing against or moving over another
4 Cylical occurring in cycles
5 Demand-defficient aggregate demand (AD) is less than the aggregate
supply (AS)

List of Marking

Name: AINUL FATINAH Asessment Mark

DAYINI BINTI MOHD SABRI
Matric No.: 2021603808 Introduction /2
Picture: Point + Explanation /8
Suggestion & Conclusion /2
Source of references (4 authority sources- /4
journal, text book, annual report etc)
Ethics & moral professionalism /4
(cooperation, no plagiarism, proactive &
creativity in writing)
TOTAL /20