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The Effect
Of Exchange Rate Devaluation On The Nigerian Balance Of Payments
ABSTRACT
This work
sets out to examine the relationship between balance of payment and exchange
rate. The work is divided into five chapters; chapter 1 gives a general
introduction to the subject matter, chapter two gives the general review of
literature in the subject matter, chapter 3 gives or states the methodology and
specifies the model used for testing. Chapter four runs the required test and
provides the result as well as the interpretation and chapter five concludes
the findings and recommends policy for the government based on the findings in
the test.
The ordinary
least square regression (ols) method is used to test for R-squared test
(explanatory power of the variables), T-test for the reliability, F-test for
the overall significance of the exponentials and D.W test which is the
econometric criterion for testing for presence of auto regressive scheme.
From the
result gotten, a 3013% change in balance of payment is caused by a unit change
in exchange rate, a 120% change in balance of payment is caused by a unit
change in foreign direct investment, and 865821% change in balance of payment
is caused by a unit change in trade openness.
The result
shows a negative relationship between balance of payment and the explanatory
variables (exchange rate, foreign direct investment, and trade openness). Since
exchange rate devaluation has a negative impact on the balance of payment it is
recommended that the government should not consider it a policy for economic
development.
CHAPTER ONE
GENERAL
INTRODUCTION
1.1 BACK GROUND OF STUDY
Right from
the immemorial that would be called a country’s exchange rate and balance of
payment as usually regarded as the sum of indices by which a nation’s strength
can be measured especially economic strength. Although the economic power of a
nation is not a criterion for measuring the strength of the nation on its own,
it is also seen that economic strength can clearly be seen as a measure of the
rate of growth and development of a nation and the well being of its citizens.
Paul (1996) defines balance of payments as an accounting record to all monetary
transactions between a country and the rest of the world.
These
transactions include payments for the country’s exports and imports of goods,
service and financial capital, as well as financial transfer. It summarizes the
international transaction for a specific period usually one year is prepared in
single currency for the country concerned. Nzotta (2004) defines foreign
exchange as the value of foreign nation’s currency interims of the home nation
currency. In finance the exchange rates (as also known as the foreign exchange
rate or forex rate) between two currencies specify how much one currency is
worth in terms of the other.
Devaluation
is a tall in a fixed exchange rate, which reduces the value of a currency in
terms of other currencies. So what we are trying to do in this study is to
determine how the reduction the
value of a currency with respect
to the currency of another country affect the record of all
monetary transactions between a country and another, whether
visible or invisible in a period of
time. This is very important because no
nation ca exist on its own no mater how
independent on self-sufficient it must necessary have relation with other
nations which can be characterized by
goods and services going one way
and foreign exchange
going the other way access the
boundary of the nation concerned and
naturally a record of that was
gained or what was lost will be kept by both. As such a nation’s
foreign exchange and balance of payments can either help slowdown.
Accelerate or decelerate walking growth progress and development this will also naturally have a positive
or negative effect on the citizens since
it deals mainly will economic relations
which in one way or the other the citizens will benefits from.
Our nation
Nigeria is currently facing serious problems regards its foreign exchange
rating (which is very low in comparison to other countries) and its balance are
payment which is clearly in disequilibrium and in a deficit. As a result of
this the government is retrogressing and the citizens clearly sufficing.
It has also been discovered and it is
clearly seen that as a result of these factors other factors are also yielding
negative dividends and also affecting the nations and citizen adversely. It is
in a bid to discover why this is so and how this can be solved that this study
as pertinent.
1.2 STATEMENT OF THE RESEARCH PROBLEM
Foreign
exchange and balance of payment are the key factor of a nations live. They are
also factors to look into when comparing a country’s relationship with other
nations. These factors directly or indirectly affect a host of other factors
which are of severe nation importance in any nation. Consequently these factors
can be seen as essential to the growth and development of the nation.
Currently these two factors can be
said to have crippled the Nigeria economy and made live uncomfortable and
unbearable for it citizens. These factors have brought the country to a level
were growth and development appear to be an illusion.
Currently
the nation’s exchange rate has fallen so low due to unfavorable nature of the
competing power of the nation’s currency with foreign currencies of the world.
Our economy has been trying to resolve the problem of external and internal
balance, which has manifested in disequilibrium in our balance of payment and
causing us a balance of payment deficit.
Much
controversy had also been degenerated by the devaluation of our Naira (the national
currency). Relevant literature and opinion on this issue are of the view that
exchange rate policy plays an important role in including maintenance of
internal and external balance, on the other hands, other writers argued that
devaluation is not the best policy for the less developed country because of
many diverse results it is capable of including these arguments with the
deteriorating nature of the economy have made the study of this nation
imperative.
1.3 OBJECTIVES OF THE STUDY
The general
objective of this study is to examine the effect of exchange rate devaluation
on the balance of payment of a nation with special reference to Nigeria. The
specific objective are
1. Give
a through insight of exchange rate and its devaluation
2. Give a through insight of balance of
payment.
3. Identify the effect of devaluation and
other factors on the nation’s external account.
4. Evaluate the impact exchange rat variation
has on the Nigeria balance of payment.
5. Identify all problems affecting the
Nigeria balance of payment and its exchange rating.
6. suggest ways of resolving this problem
7. Proffer some policy prescriptions correct
the in balance in the internal and external sectors of the Nigeria economy that
will pave the way for the resumption of sustainable grown.
8. Give an insight into exchange rate and
balance of payment and their effect on the nations economy, its and development
and its citizens.
9. Give an insight into how the exchange rate
and balance of payment of the nation affect its relations other nations.
10. To determine and explore any
existing relationship between exchange rate and balance of payments.
1.4 RESEARCH HYPOTHESES
Hypotheseswill
be tested in other to allow success of this work some of them include;
1. There is no significant relationship
between exchange rate and balance of payment (Bop) in Nigeria.
2. There
is no significant relationship
between open economy(X-m) and balance of payments in Nigeria
3. There is no significant relationship
between foreign direct investment (FDI) and balance payment (Bop) in Nigeria.
1.5 SCOPE OF STUDY
This study
is limited to exchange rate and its devaluation effect on balance of payment
with reference to the Nigeria economy. Since the subject matter is very wide,
any attempt to go future than this will involve going into limitless research
with a limitless scope.
Therefore it
is necessary to limit our study to the exchange rate and its devaluation and
its effect on the balance of payment of Nigeria economy.
1.6 SIGNIFICANCE OF STUDY
The exchange
rate and balance of payments of any nation are the heart and foundation of any
governments’ development. Currently these are very controversial factors that
are not doing well on Nigeria. Naturally, since our economy is import dependent
and as such dependent on other nations this affects us greatly especially since
foreign involvement and foreign exchange is involved in every sector of the
economy. It is the significance of this study therefore; to create awareness on
the relationship between exchange rate, its devaluation and balance of
payments, policy implications and recommendations which will be of immerse help
of policy makers and balance of payments, and government especially as it
regards the transaction of the exchange rate and balance of payment in Nigeria
and other less developed countries. It is also of importance to students and
lectures and the entire public who is interested in the subject matter and its
utilization in which ever way.
1.7 ORGANIZATION OF STUDY
This study
is organized in five chapters, chapter one, deals with the introduction
consisting of background of the study statement of the problem, objectives of
the study, significance of study, scope of study, research hypothesis, and the
organization of study. Chapter two gives the theoretical frame work and
literature review. Chapter three consist the methodology model specification,
associated data source and the technique for analysis of data source. Chapter
four contains the empirical results and analysis. Chapter five finally, concludes
the study with the summary of the result, recommendations and fins
conclusion.
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