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The Analysis
Of The Impact Of Unemployment And Inflation On Balance Of Payment In Nigeria
CHAPTER ONE
1. O
INTRODUCTION
1.1
BACKGROUND
The major
goals of macro-economic policy are: to achieve full employment in other words
maintain a low and stable level of unemployment. To maintain a relative stable
level of price payment position at a fixed stable exchange rate of growth.
Practically,
inflation which is a persistence increase in general price level is one of the
macro-economic problems facing Nigeria today. According to Ewa Udu and Agu G.A
it began in Nigeria during and after the Nigeria civil war (that is from
1965-1970).Before the war, there was noticeable increase in the price of so
many commodities such as a bag of 50cups of rice that cast #14.00 rises to
#43.00 immediately after the civil war in 1970. Also there was an increase in
the price of other goods and since 1979 the rate of inflation in Nigeria has
been increasing.
Again, the
Nigeria civil war (that is secessionist Biafra) was faced with hyperinflation.
During that time everything was scarce relative to demand. This is because
there was excess supply of money by the federal government in attempt to
persecute the war with few available goods. More so inflation has been a scarce
of concern to the government and something that was to be abided absolutely at
any cost, because it is one of the worst imaginable social evil in a society.
However,
there have been observed period of unemployment in Nigeria until 1930’s when
the whichclassicalpropoundthatthe econo demand for labor will also be equal to
the supply of the labour at the prevailing money wage rate, as this theory
collap government has lend to accept periods of unemployment as inevitable. Since
independence in 1960 and in mid of 198 one of the most untreatable problem
facing the Nigeria economy up till today. It
assumes
alarming dimension with the emergence of graduate unemployment. As a result of
this, the government has made many attempts at achieving full employment
through their various policies.
Nigeria
economy has undergone strains and stresses in their balance of payment since
the collapse of thetime, oil
Nigeria
export was mainly crude oil which grew steadily from 1975 and reached a peak in
1980, the import grew faster, bringing about a growth deficit in the visible
trade
balance. Also the production and consumption patterns that emerged from, the
era of the oil boom could not be sustained in the face of declining export or
foreign exchange and inflation resulted from the heavy borrowing by the
civilian administration, this made the balance of payment, capital account
balance to reduce to degree of deficit which leads to low external reserve.
Furthermore inflation is generally used to describe a situation of rapid
persistence and unacceptable increase in general price level in any economy
which brings about decrease in the value of currency.
Also Lerner
(1949: pg 27) describe inflation as an excess of demand over supply. Again
Solow (1970) sees inflation as going on when one needs more and more money to
buy some representative bundle of goods and services meaning that inflation is
a part of the adjustment process between two equilibrium. However it is not
every rise in price that is being regarded as inflation but a persistent rise
in aggregate price of goods and services; this is because price may be rise to
support a higher level of aggregate welfare.
The main
reason for allowing inflation is because it allows for substantial redistribution
of income and wealth from savers to borrowers that is from those who cannot
protect themselves from the rise in the price of what they buy by
raising the
price of what they sell to those who can afford. High inflation hamper growth
and development of an economy as it discourage savings and investment.
Meanwhile,
the dynamic feature of unemployment has several factors being temporal or
chronic in nature. A person is said to be unemployed when he or she is able and
willing to work and is available for work (the person is actively searching for
employment) but does not have work. There are so many types of unemployment
which are functional unemployment which result from normal turnover of labour ,
a structural unemployment refers to unemployment rising because there is a
mismatch of skills and job opportunities when the pattern of demand and
production changes, mass unemployment is the most serious type of unemployment.
Since it occurs because of general deficiency in demand and equally affects
every sector of the economy. We are concerned about unemployment for many
reasons firstly; unemployment generally reduces output and aggregate income.
Increase inequality since the unemployed lose more than the employed. Secondly
it makes the unemployed ones sometime feel as if the society does not need
them. This therefore, causes misery, social unrest and hopelessness. There are
so many causes of unemployment such as demographic factors, low rate of
industrialization strategy and the minimum role of the government.
The balance
of payment is a record of all economic transaction involving payment and
receipt between the residents of one country and the residents of other
countries of the world in any period usually in one calendar year. Specifically
the balance of payment records the import of goods and services, income
transfer as well as changes in country liabilities to claim assets on the rest
of the world. It is a flow not a stock concept and involves more than payment,
that is transaction that are not paid in cash and kind, deferment of debt,
services payment due to unremitting profits among others. Exceptional financial
items means those transactions that finance balance of payment needs or are
undertaken to bridge the gaps in the balance of payment. As a result of the
importation of crude oil in the economy, Nigeria balance of payment is divided
into oil and non-oil sectors. The oil sector is the most significant components
of the economy and the largest foreign earner.
In assessing
the cost of inflation distinguish between perfectly anticipated inflation which
occurs when the rate of inflation is expected and has been taken into economic
transaction that is the exchange rate will be adjusted tp eliminate
any adverse effects
of inflation on t
Nigeria
inflation rate is above that of her competition the value on naira would
depreciate
quickly to restore price competitiveness, but in reality exchange rate do not
adjusted perfectly anticipated inflation rate means unexpected inflation.
One of the
causes of balance of payment problems is domestic inflation.
Inflation
create no problem for the balance of payment if a also inflating at the same
rate since it is relative prices that matters in international trade as
domestic trade if however, one country faster than the levels of competitors
countries, imports will rise more than the
levels of
export and balance of payment problem will ensure moreover, a necessary
condition to concern about the balance of payment in the policy decision is
support a fixed exchange rate rather than allow the rate to be determined in
free market, so as to eliminate fluctuation in the balance of payment rate.
In the
recent years there has been emphasis laid pertaining to the relationship
between inflation and unemployment. According to Milton Friedman, high
inflation increase unemployment in several ways:
I. High inflation may lead to government
to impose wages and price control thereby impending market forces which
increase unemployment.
II. High inflation rate increase the risk
associated with any assessment of future returns on investment.
III. High inflation may depress consumption
as it reduces the purchasing power of any currency.
Friedman’s
observation shows that rate of inflation and the rate of unemployment. That is,
inflation and unemployment moves in the same direction. The question at this
point
is does
inflation and unemployment really moves in the same direction, do they move in
the same direction in Nigeria? What is the trade off like in Nigeria? Although
low rate of inflation is an advantage to a country, it could be argued that the
disadvantages of inflation are greater than its advantage.
1.2 STATEMENT OF PROBLEM
Inflation,
unemployment and maintenance of stable balance of payment are all basic
macro-economic problems facing every government in the world today. Inflation
causes uncertainty about future prices, thereby affecting the decision on
expenditure, savings and investment and causes misallocation of resources. High
inflation equally boosts growth and development policies of the policy makers.
Our concern on unemployment is based on the fact that high unemployment leads
to loss of output and reduction in aggregate income, it increases inequality
since the unemployed loose more than the employed. Prolonged unemployment can
cause misery, social unrest, loss of confidence and hopelessness for the
unemployed; more so unemployment usually unwanted by the unemployed.
Nigeria’sanceofpaymentbalhave
continued to show deteriorating trends. The cause of this deterioration
includes, the import syndrome, mounting external indebtedness, hostile international
environment, over dependence on crude petroleum etc, there is a link among
these variables, which after time leave government confused and defected. This
is because low unemployment is associated with a rapid rate of inflation;
similarly high unemployment implies self-labor markets and consequent inability
to push up wages. Consumers income and
spending and
also depressed and demand condition for rapid inflation are therefore
unfavorable. Therefore, there is a tradeoff between the rate of inflation and
unemployment. Price stability can only occur at the cost of high unemployment
rate and low unemployment rate can only occur at the cost of inflation.
However, the
Nigerian economy does not reflect this so called tradeoff. This is because
experience has shown that rising inflation also leads to unemployment rate
increase, despite the monetary and physical policies by the authoritative in
Nigeria.
1.3 OBJECTIVE OF THE STUDY
The
objective of the study; “anempirical analysis of the link between inflation,
unemployment and balance of payment in Nigeria”includesthe following:
i. To analyze the impact of inflation
and unemployment on balance of payment.
ii. To determine the rate of inflation or
unemployment that hampers economic growth and hinders development.
1.4 To make useful recommendation based on
the empirical find.
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