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Analysis Of
The Determinations Of Inflation In Nigeria
ABSTRACT
Inflation
has become a heading topic of discussion in the Nigeria economy and other
countries of the world. The press as its effect penetrates more deeply into the
nation’s life. It has become som continuous increase in price is among the
serious economic problems of our time. The main purpose of the study is to
highlight the determinants of inflation in Nigeria and to check the trend of
inflation over time (i.e. 1980 -2010) and the measures to curb it. The
methodology involves the use of ordinary least square econometric techniques
using PC Give econometric package. These include T-test, to test the
explanatory power of the estimates, the F-test to determine the significance of
the entire regression plan and the second order tests, which includes test for
auto-correlation, normality test, heteroscedasticity test and multicollinearity
test. The objective of the study are to determine the possible determinants of
inflation rate in the country and to provide economic policies and solutions to
the issue of inflation in Nigeria. The data were largely the secondary data
which are collected from CBN statistical bulletin. The data are collected for
inflation rate and its determinants from 1980-201o. The dependent variables are
money supply, government expenditure, real gross domestic product and real
exchange rate. The regression result shows that real exchange rate, Government
expenditure have a negative impact on inflation while money supply and real GDP
have a positive impact on inflation respectively. This implies that an increase
in real exchange rate, Government expenditure will reduce inflation while an
increase in money supply and real GDP will increase inflation. The researcher
recommends that monetary and fiscal policies should be used to control and
direct economic activities of a country to avoid inflation.
v
TABLE OF
CONTENT
Title
page...........................................................................................................................
i
Approval
page.................................................................................................................
ii
Dedication..........................................................................................................................
iii
Acknowledgement...........................................................................................................
iv
Abstract..............................................................................................................................
v
Table of
content...............................................................................................................
vi
CHAPTER ONE:
INTRODUCTION
1.1
Background of the
study.......................................................................................
1
1.2
Statement of the problem.....................................................................................
3
1.3
Objectives of the
study..........................................................................................
4
1.4 Research
hypothesis...............................................................................................
4
1.5
Significance of the
study.......................................................................................
5
1.6 Scope
and Limitation of the
study.................................................................... 6
CHAPTER TWO
2.1
Literature
Review....................................................................................................
7
2.2
Theoretical
Review..................................................................................................
7
2.2.1 Effects
of
Inflation...............................................................................................
11
2.2.2
Determinant of Inflation in
Nigeria............................................................... 13
2.3
Empirical Review....................................................................................................
16
2.3.1 The
Nigerian recent inflationary
experience............................................... 17
2.4
Limitations of the previous study.....................................................................
20
vi
CHAPTER
THREE
3.0 Research
Methodology..........................................................................................
22
3.1 Research
Design.......................................................................................................
22
3.2
Methodology.............................................................................................................
22
3.3 Model
specification.................................................................................................
23
3.4 Model
Evaluation....................................................................................................
23
3.5 Economic..............................
A’priori Criteria 24
3.6
Statistical Criteria or first
order.........................................................................
25
3.7
Econometric Criteria or second order test......................................................
26
3.8 Data
required and
sources....................................................................................
27
CHAPTER
FOUR: DATA PRESENTATION AND ANALYSIS
4.1
Presentation and interpretation of result.........................................................
28
4.2
Economic
a’priori............................................ criteria 29
4.3
Statistical criteria (first order
test)..................................................................... 30
4.4
Econometric
criteria................................................................................................
33
CHAPTER FIVE
5.1 Summary
of finding, Recommendations and Conclusion......................... 38
5.2
Recommendations...................................................................................................
39
5.3
Conclusion.................................................................................................................
40
Bibliography.....................................................................................................................
41
Appendix
..........................................................................................................
vii
CHAPTER ONE
1.1
BACKGROUND OF THE STUDY
The
avoidance of rapid increase in general price level which is inflation is one of
the micro economic objectives of any economy. When the price level rises, each
unit of currency buys fewer goods and services. Consequently, inflation also
refers to erosion in the purchasing power of money, a loss of real value in the
internal medium of exchange and unit of account in the economy. A chief measure
of price inflation is the price inflation rate, the annualized percentage
change in a general price index (normally the consumer price index) over time.
Solow
(1979), for instance, sees inflation as going on when one needs more and more
money to buy some representatives bundle of goods and services, or sustained
fall in the purchasing power of money, a sustained rise in price
level(Johnson,1972).A persistence and appreciable rise in the general level of
prices(Shapiro,1994)and a continuing rise in prices as measured by an index
such as the consumer price index (CPI) (Dernbury and Mc Dongall).
Robert J.
Gordon (1986) describes three major types of inflation as the
“triangle
model” and these-pushincludesinflation d and built-in inflation.
1
The demand
pull inflation occurs when aggregate demand for goods and services is greater
than the aggregate supply such that the resultant excess demand cannot be
satisfied by running down on existing stocks, diverting supplies from the
export market to the domestic market, increasing imports.
The
cost-push also known as supply shock inflation caused by drops in aggregate
supply due to increased prices of inputs, for example take for instance a
sudden increase in the supply of oil, which would increase oil prices,
producers for whom oil is a part of their cost could then pass is on to
consumer in the form of increase prices.
Built-in
inflation is induced by adaptive expectations and involves workers trying to
keep their wages up with prices and firms passing their higher
labour cost
unto their customerTheas hi presence of inflation in a country leads to a fall
in the function of money as a
medium of
exchange and a store of value.
The
beginning of inflation in Nigeria can be said to be a direct result of policies
of the country’s Government growth and development since 1951 when ministerial
Government was introduced. Inflationary trend since independence shows the rate
of inflation as
been 11.4
percent in 1980,7.7 percent in 1982,23.2 percent in 1983,40 percent in 1984 and
40.9 in 1989. (Anyanwu, 1995). Inflation has continued recently to
be a
leading topic in
Nigeria’s famil
2
deeply into
the nation’splatitudelifetosay. thatIt has sharp, continuous increases in
prices are among the most serious economic
problem of
our time.
Inflation
can also be in form of galloping inflation which is a situation where by
inflationary rate becomes immensurable and uncontrollable. The central bank of
Nigeria (CBN) being part of the macroeconomic management agency indulges in
finding out the determinants of inflation in the economy and set up the
required macroeconomics policies that will help to reduce the inflationary rate
in the economy.
1.2
STATEMENT OF THE PROBLEM
Inflation
has a negative Impact in the economy as a whole. It is backed up with an
increment with the wages and salaries of workers and also leads to fall in
standards of living and economic development of the nation.
High or
unpredictable inflation rate are regarded as being harmful to the overall
economy. They add deficiencies in the market and make it difficult for
companies to budget or plan long term. Uncertainty about the future purchasing
power of money discourages investment and savings.
In Nigeria,
some of the macro economic variables determining inflation are said to be real
Gross Domestic Product (GDP), exchange rate, government expenditure and money
supply. Therefore, the study is intended to look into the
3
possible
determinants of inflation and recommend solutions to the inflationary
trends in
the Nigerian economy.
1.3
OBJECTIVES OF THE STUDY
The study
has the following o
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