The Analysis Of The Impact Of Unemployment And Inflation On Balance Of Payment In Nigeria

Project and Seminar Material for Economics

The Analysis Of The Impact Of Unemployment And Inflation On Balance Of Payment In Nigeria


Abstract


This study is on the analysis of the impact of unemployment and inflation of balance of payment in Nigeria. The total population for the study is 200 staff of CBN, Abuja. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made human resource managers, accountants, administrative staff and junior staff were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies


Chapter One


Introduction

1.1 Background of the Study

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 classical economist theory which propound that the demand for labor will also be equal to the supply of the labour at the prevailing money wage rate, as this theory collapsed, due to the depression of the 1930’s government has lend to accept periods of unemployment as inevitable. Since independence in 1960 and in mid of 1980’s unemployment have been viewed as 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 the oil boom in early 1980’s. During that time, 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 to eliminate any adverse effects of inflation on the balance of payment. For instance, ’’if 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 all one’s competitor are also inflating at the same rate since it is relative prices that matters in international trade as domestic trade if however, one country’s price level is rising 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:

  1. High inflation may lead to government to impose wages and price control thereby impending market forces which increase unemployment.
  2. High inflation rate increase the risk associated with any assessment of future returns on investment.
  3. High inflation may depress consumption as it reduces the purchasing power of any currency.

Friedman’s observation shows that there is a positive link between the 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 the 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’s balance of payment have 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; “an empirical analysis of the link between inflation, unemployment and balance of payment in Nigeria” includes the following:

  1. To analyze the impact of inflation and unemployment on balance of payment.
  2. To determine the rate of inflation or unemployment that hampers economic growth and hinders development.
  3. To make useful recommendation based on the empirical find.

1.4 Research Hypotheses

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

  1. H0: there is no impact of inflation and unemployment on balance of payment.
    H1: there is impact of inflation and unemployment on balance of payment.
  2. H02: the rate of inflation or unemployment does not hampers economic growth and hinders development
    H2: the rate of inflation or unemployment hampers economic growth and hinders development

1.5 Significance of the Study

The study is significant in many ways:

  1. It will bring into live light the salient features of the issues being discussed.
  2. The study will aid the police makers in Nigeria in terms of management policies to curb inflation, reduce unemployment especially among the youths etc.
  3. The study will underscore some of inadequacies of the authorities in their quest to solve the macro-economic problems and thus providing a spring board for better decision.

1.6 Scope and Limitation of the Study

The scope of the study covers the analysis of the impact of unemployment and inflation of balance of payment in Nigeria. The researcher encounters some constrain which limited the scope of the study;

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational Privacy:

Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities


1.7 Definition of Terms

Unemployment:

Unemployment is the situation of actively looking for employment but not being currently employed. The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force.

Inflation:

In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.

Balance Payment:

The balance of payments, also known as balance of international payments and abbreviated B.O.P. or BoP, of a country is the record of all economic transactions between the residents of the country and of the world in a particular period (over a quarter of a year or more commonly over a year).


1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  • Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
  • Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
  • Chapter three deals on the research design and methodology adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain the analysis of the impact of unemployment and inflation of balance of payment in Nigeria. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of the analysis of unemployment and inflation of balance of payment in Nigeria


5.2 Summary

This study was on the analysis of the impact of unemployment and inflation of balance of payment in Nigeria. Three objectives were raised which included: To analyze the impact of inflation and unemployment on balance of payment, to determine the rate of inflation or unemployment that hampers economic growth and hinders development, to make useful recommendation based on the empirical find. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of CBN, Abuja. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made human resource managers, accountants, administrative staff and junior staff were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies


5.3 Conclusion

Unemployment and inflation poses a serious problem in any economy. Studies carried out by most economists revealed that in the quest to reduce unemployment, rising inflation may be risked. We can say conclusively and without much ado that inflation and unemployment have significant impact on economic growth in Nigeria. The trade-off relationship between unemployment and in inflation poses a dilemma for our policy formulators, since in order to reduce unemployment, the inflation rate in the economy tends to rise. Thus, of great importance is the need for constructive and well-specified policy recommendations that will help to ameliorate the situation of unemployment and inflation in Nigeria


5.4 Recommendation

  1. Government should strive to develop the agricultural sector which has great potentials to increase the supply of farm products and other basic necessities of life. The increased supply will reduce prices and increase in employment generation. To achieve this, various specific agricultural policy measures should be promoted and pursued vigorously.
  2. Massive investments should be carried out in the real sector of the economy, by establishing job-creating industries, which will help to reduce the level of unemployment in the country, increase output, reduce prices of goods and services, and thus, reducing the level of inflation in the economy.
  3. The free flow of information between employers and employees should be enhanced, through the reduction in the cost of job or employee search by means of job data banks, thus resulting to increased efficiency in the labour market. Similarly, training and educational programmes should be increased and geared towards innovations and productivity, thereby, reducing the rate of unemployment in the economy. iv. It is also recommended strongly that special attention be given to policy implementation. In this regard, the government should set up a policy implementation body or committee in the presidency for the purpose of monitoring government policies and ensuring that they are implemented according to prescriptions.

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