ECONOMICS NOTE FOR SS2 TERM 3

WK 1
NATIONAL INCOME ACCOUNTING
Meaning: National income (N.I.) is the monetary value of all the final goods and services
produced by a country during a specified period of time usually one year.
The National Income is different from the income of the government which refers to the revenue
the government raises through taxation and borrowing.

Concepts of National Income

1. Personal income - Personal income is the sum of all incomes actually received by all
individuals or households during a given year. In National Income there are some incomes,
which are earned but not actually received by households such as Social Security contributions,
corporate income taxes and undistributed profits. On the other hand, there are income (transfer
payment), which is received but not currently earned such as old age pensions, unemployment
doles, relief payments, etc. Thus, in moving from national income to personal income we must
subtract the incomes earned but not received and add incomes received but not currently earned.
Therefore,
Personal Income = National Income – Social Security contributions – corporate income taxes –
undistributed corporate profits + transfer payments.

2. Disposable income-From personal income if we deduct personal taxes like income taxes,
personal property taxes etc. what remains is called disposable income. Thus,
Disposable Income = Personal income – personal taxes.
Disposable Income can either be consumed or saved. Therefore,
Disposable Income = consumption + saving.

3. Gross Domestic Product (GDP)- Gross Domestic Product (GDP) is the total market value of
all final goods and services currently produced within the domestic territory (by nationals and
non-nationals) of a country in a year.
The GDP is used as an economic indicator in determining whether the country is growing,
declining or stagnant.
4. GDP @ Market prices -GDP at market price as “the market value of the output of final
goods and services produced in the domestic territory of a country during an accounting year.
Calculated with the current price.
5. GDP @ factor prices -GDP at factor cost is the sum of net value added by all producers
within the country. Since the net value added gets distributed as income to the owners of factors
of production, GDP is the sum of domestic factor incomes and fixed capital consumption (or
depreciation).
6. Gross National Product (GNP)- Gross National Product is the total market value of all final
goods and services produced in a year by nationals. GNP includes net factor income from abroad
whereas GDP does not. Therefore,
GNP = GDP + Net factor income from abroad.
Net factor income from abroad = factor income received by nationals from abroad – factor
income paid to foreign nationals in the country.

7. Net Domestic Product (NDP): NDP is the value of net output of the economy during the year
Net Domestic Product = GDP at Factor Cost – Depreciation.
8. Net National Product (NNP): NNP is the market value of all final goods and services after
providing for depreciation. That is, when charges for depreciation are deducted from the GNP we
get NNP at market price. Therefore’
NNP = GNP – Depreciation
Depreciation is the consumption of fixed capital or fall in the value of fixed capital due to wear
and tear.
9. Income Per Capita- Per Capita Income:
The average income of the people of a country in a particular year is called Per Capita Income
for that year. Whether the PCI of a country is high or low depends majorly on the available
resources and the size of the population of the country. This concept also refers to the
measurement of income at current prices and at constant prices. For instance, in order to find out
the per capita income for 2001, at current prices, the national income of a country is divided by
the population of the country in that year.
10. Price Index- Price index (PI) is a measure of how prices vary over a period of time, or it
is a way of measuring inflation. An increase in the price level signifies that the currency in a
given economy loses purchasing power (i.e., less can be bought with the same amount of money)
The price index is a number or figures used to show the average rise and fall of price in
percentage terms with reference to a base period.
Index Number = Current year price X 100
Base year price

11. Real GDP- GDP is calculated on the basis of fixed prices in some year, it is called GDP at
constant prices or real GDP.
12. Nominal GDP -When GDP is measured on the basis of current price, it is called GDP at
current prices or nominal GDP.
13. GDP Deflator -The GDP deflator is defined as: GDP deflator = Nominal GDP/Real GDP.
The GDP deflator is the ratio of nominal GDP to real GDP.
14. The CPI or RPI is:
For example, suppose that the typical consumer buys 5 apples and 2 oranges every month. That
is, the basket of goods consists of 5 apples and 2 oranges.
The CPI or RPI is:

* 100

Measurement of National Income

Income Approach: In this method, the total monetary values of income received by individuals,
business organizations, government agencies within a year for their participation in production.
The income received by factors of production in the form of wages or salaries, rent, interest and
profits is added together. To avoid double-counting, transfer incomes or payments are not
included.
Sum of net receipts accruing to factor inputs.
GDI m=( w+r +i+ π ) +indirect taxes
GNI m=GDI m + ( X−M )
Where m=market prices and ( X −M )= net income from abroad
Output Approach or Product Approach: Net monetary value of all the goods and services
produced by an economy. It is calculated using the value-added method (Gross output-
intermediate purchases) . Sectoral or industrial analysis is used.
GDPm =value added by all t h e sectors ❑
GNP m=GDPm + Net Exports ( X− M )
GNP f =GNP m +subsidies−indirect taxes
NNP m=GNPm −Depreciation
NNP f =GNP f −Depreciation
Expenditure Approach: This is the calculation of the total monetary value of expenditure on
goods and services by government individual organization etc. within a country in a given
period. In this calculation expenditure on inter mediate goods and services bought and used for
further production must be excluded. This is done in order to avoid double counting and
therefore, the calculation should particularize only on expenditure on the monetary value of final
goods and services.

Y =C + I +G+( X−M ) the simple Keynesian Model

Example 1
Below is information concerning the gross national product for a country in 1994 (in billions of
naira) by sectors that buy the GNP.
Heading Amount
Personal Consumption expenditures 637.3
Gross Private domestic investment 452.2
Government purchase of goods and services 105.3
Exports of goods and services 1001.
Imports 50.3
a. What method of national income is used for the above table?
b. Calculate the national income of the solution.

Solution
a. The method used is the expenditure method.
b. Since we are concerned with the expenditure method we have.
GDP = C + I + G + (x – m)
Substituting
GDP = N637. 3 + N453.2 + N105.3 + (N100.1 – N50.3) = N1,245.66
Example II
The national income equation of a hypothetical country is expressed as:
Y=C+I+G
Where:
C = a + by
N100m + 3/4Y
I = N20m
G = N40m
Where C, I and G are consumption, investment and government expenditure respectively.
Calculate the equilibrium level of national income.
Solution:
Y =C+I+G
Y = a + by + I + G
Substituting into the equation above
Y = #100m + 3/4Y + #20m + #40m
Collecting like terms
(Y – 3/4Y) = 100m+ 20m + 40m
Factorise the RHS
Y(1 – ¾)
Y ( ¼ ) = N160m
Divide both sides by ¼
Y/¼ 160
¼ = ¼
Y = 160 x 4/1 = N640m

Limitations of the Income Approach

1. Owner-occupied houses
2. Self-employed persons
3. Goods for self-consumption
4. Wages and salaries paid in kind.
Limitations of the Output Approach
1. Quantification of depreciation
2. Quantification of non-monetized services e.g. services of housewives.
3. Income earned through illegal activities
4. Distinction between intermediate goods and final goods
5. Price changes
6. Second hand goods and assets
Limitations of the Expenditure Approach
1. Government services
2. Durable consumer goods
3. Transfer payments
4. Public expenditure
Sources of National Income Statistics
1. Foreign trade figures
2. Pay-rolls
3. Income tax returns
4. Economic surveys
Reasons for Measuring National Income
1. 1. Economic planning: The national income estimate is vital for economic policy and
planning.
2. Measurement of economic progress: Measured through the output approach enables the
country to know the performance of the various sectors of the economy
3. Measurement of standard of living: It gives an indication of the standard of living of the
country through the measure of per capita income.

4. Comparison of standard of living between countries

5. Basis for aid and technical assistance
6. Basis for foreign direct investment: Foreign investors usually seek countries with rich or fast-
growing markets.

7. Basis for contributions to international organizations.

Limitations of the Usefulness of National Income Statistics
1. Variations in methods of computation
2. Differences in structure of production
3. Failure to review the distribution of income
4. Changes in population.
5. Differences in Priorities
6. Changes in the value of money
Standard of Living and Cost of Living
Standard of living deals with the welfare attained by individuals in a country at a particular time.
This welfare is measured in terms of quality and quantity of goods consumed. Since the quantity
of goods consumed depend in part on income, the per capita income is often used as proxy for
measuring the standard of living. A low per capita income implies a low living standard.
Cost of Living refers to the total expenditure or money cost incurred on the purchase of goods
and services at a particular time. The cost of living largely depends on the price of goods and
services. Higher prices indicate higher cost of living.
The Circular Flow of Income
Meaning: The circular flow of income is a circle that shows the movement of income and the
flow of goods and services amongst economic agents (Household, Firms, Government and the
External Sector). The circle seeks to explain how services are rendered and paid for as well as
income generated and expended. The explanation of the circle is based on sectors (2, 3 or 4). We
shall consider the two sector model and the three sector model
**Recall the simple Keynesian Model: Y =C + I +G+( X−M )
The Two Sector Model
The Two Sector Model: The two sector model is based on the classical assumption of no
government intervention in economic activities. Hence, Y =C + I or Y =C + S ⇒ I =S @
equilibrium. This sector could be better explained using the case of a spendthrift economy and a
frugal economy.
Spendthrift Economy (2-SECTOR)

(Spendthrift)

The Frugal Economy (2-SECTOR)

 (Two Sector Model)
The Three Sector Model
The Three Sector Model: The three-sector model recognizes the role of government in
economic activities (Keynesian implicit assumption). This model captures receipts (taxes) and
payments (investment) by the government in addition to the activities of households and firms as
explained in the two sector model.

The Three Sector Model

The Three Sector Model

The concepts of Consumption, Savings and Investment

Recall, earned income is either consumed and part saved or invested. Thus,
Y =C + I or Y =C + S ⇒ I =S. This shows that the variables are related
Consumption & Savings
• Consumption Expenditure: This is the income spent on the purchase of goods and
services by households. Consumption (C) depends on income(Y). Thus ,
C=f ( Y )∨¿
C=α + βY
where α =automous consumption∧¿
β=marginal propensity ¿ consume
• Savings: This refers to disposable incomes which are not consumed.
S=f ( Y )∨S=f (r )
where r= interest rate
Individuals save for the following reasons:
1. To raise capital
2. For unforeseen contingencies
3. For speculation
4. To acquire assets
5. For future purposes
Factors that affect savings
1. The size of income
2. The rate of interest
3. Cultural attitude
4. Government policies

Average Propensity to Consume (APC)

&
Average Propensity to Save (APS)
Recall, Y =C + S−−−−−−−−−−−−−−−−−−( i ) (Relationship)
Divide both sides by Y
C S
1= + −−−−−−−−(ii)
Y Y
C S
Where APC= ∧ APS=
Y Y
1= APC + APS−−−−−(iii )
Marginal Propensity to Consume (MPC)
&
Marginal Propensity to Save (MPS)
Recall ∆ Y =∆ C+ ∆ S−−−−−−−(iv)
Dividing both sides by ∆ Y
∆C ∆ S
1= + −−−−−−−−−(v )
∆Y ∆ Y
∆C
Where MPC= marginal propensity ¿ consume and
∆Y
∆S
MPS= marginal propensity ¿ save
∆Y
1=MPC + MPS−−−−−−−−−(vii)
 Investment
Investment: This is the expenditure on capital goods which are not meant for immediate
consumption.
Types of Investment
1. Individual investment: This may be on buildings, motor vehicles and other assets the
individual hopes may increase his income and standard of living.
2. Investment by firms: This can be on buildings machines, furniture, raw materials, semi-
finished and finished goods.
3. Government investment in social capital; These are in the areas of roads, electricity, pipe
borne water, hospitals schools.
Purpose: to improve the living condition of the citizen.
2. Government investment in public corporations: To render essential services create more
employment opportunities among others, are sure of the reasons why government invest.

Factors that determine investment

1. The amount of income earned.
2. Savings
3. Profit
4. The amount paid as tax
5. The rate of interest
6. Expectation
7. Business atmosphere
8. Political factor

Consumption is the sum of current expenditure on goods and services by individuals, firms and
government. It is also mean part of income not saved or invested. The level of consumption of an
individual depends largely on his level of current income.
Factors that determine the level of consumption
1. The level of income
2. Savings
3. Expectation of price changes
4. The rate of taxes paid
5. The influence of other households
6. Assets owned
7. The rate of interest received on investments/profit

There is a relationship between income, consumption and investment (I).

Recall, earned incomes are either consumed or saved. But the essence of savings is not just to
postpone current consumption but to invest.
Thus, Y =C + I −−−−−−−−−−−−−(viii)
equating ( i )∧ ( viii ) ⇒
C+ S=C + I
⇒ S=I −−−−−−−−−−−(ix)(Equilibrium level of national income )
The Multiplier
Meaning: The multiplier seeks to measure the precise relationship between the change in
national income and the change in other macroeconomic variables such as consumption,
savings, investment, government expenditure and net export
Y =C + I +G+( X−M )
Recall, in equation (iv) we established that a change in C or S or both will trigger a change in Y.
But the question is by what magnitude? This draws attention to investigating ΔY with respect to
ΔC, ΔI, ΔG and Δ(X-M).
TYPES OF MULTIPLIERS
From the simple Keynesian Model, we can deduce multipliers. Namely;
1. Consumption expenditure multiplier.
2. Investment expenditure multiplier.
3. Government expenditure multiplier.
4. Net export multiplier.
Note: Restrictions from the scheme at this level calls for the first three
MULTIPLIERS
1 ∆C
1. Consumption Expenditure Multiplier ( K c ¿= where MPC=
1−MPC ∆Y
 1 ∆I
2. Investment Expenditure Multiplier ( K I ¿= where MPI =
1−MPI ∆Y
1 ∆G
3. Government Expenditure Multiplier ( K G ¿= where MPG=
1−MPG ∆Y
NOTE: Where MPC= Marginal Propensity to Consume by Households.
MPI= Marginal Propensity to Invest by Firms.
MPG= Marginal Propensity to Spend by the Government.
Thus, the change in national income as a result of a change in macroeconomic variables could
be expressed as: ΔY= K C ×C i∨K I × I i∨K G × Gi
Equilibrium National Income
Equilibrium National Income
The procedure leading to the derivation of equation (viii) resulted in equilibrium national income
in a two-sector model. There are two approaches used in determining the equilibrium national
income. These are income-expenditure approach and withdrawals-injections approach
Equilibrium National Income
1. Income-Expenditure Approach:
Y =C + I +G+ ( X− M )−−−−−−(4 sector model)
2. Withdrawals-Injections Approach:
C+ S +G+ X =C+ I +T + M −−−−−−−−−−−(4 sector model)
3. The general graphical approach
Watch this approach on https://youtu.be/4tUZUiK3R2s
The Graphical Approach
WK 3 & 4
AGENCIES THAT REGULATE THE FINANCIAL MARKETS

FINANCIAL SYSTEM/MARKET
The financial system includes all financial intermediaries that operate in the financial sector in
the economy.
FINANCIAL INSTITUTIONS
Meaning: Financial institutions are firms or business organizations that deal with monetary
transactions such as investments, granting loans, acceptance of deposits, risk management,
underwriting etc. They can also be defined as arrangements which are involved in lending,
borrowing, investing and managing money or funds. They constitute the financial framework of
an economy and deal primarily in money. Financial institutions are pivotal to economic growth
and development as they play the role of mobilizing funds from surplus economic units to deficit
economic units.
The Nigerian financial system consists of the formal sector (bank and non-bank financial
institutions) and the informal sector (savings and loan association, local money lenders, etc.).

Types of Financial Institutions

Financial institutions are categorized into Bank Financial Institutions (BFIs) and Non-Bank
Financial Institutions (NBFIs).

Bank Financial Institutions (BFIs)

A bank financial institution is a financial firm that is fully licensed under the Banking Act to
operate as a bank. Such a firm is supervised by a national or international financial regulatory
agency. BFIs include: Central Bank, Commercial banks, Development banks, Mortgage banks,
Merchant banks, Savings bank etc.

Non-Bank Financial Institutions (NBFIs)

NBFIs are incorporated firms that render financial services and facilitate the mobilisation of
funds but are not licensed to operate as banks. These firms include: Insurance Companies,
Building societies, Hire purchase firms, Pension funds, Credit and thrift societies, Finance
companies etc.

REGULATORY FINANCIAL INSTITUTIONS IN NIGERIA

What is Financial Regulation?
This is the process of supervising financial institutions by setting up guidelines, requirements and
restrictions in order to maintain the integrity of the financial system.
 Regulatory agencies of financial institutions are on the other hand set up by the government to
oversee the activities of the money and capital markets (financial institutions).
A. The Regulatory Agencies of the Nigerian Money Market are

1. Financial Services Regulation and Coordinating Committee (FSRCC)

2. The Central Bank of Nigeria (CBN),
3. The Nigerian Deposit Insurance Corporation (NDIC) and
4. The Federal Ministry of Finance (FMF)

Financial Services Regulation and Coordinating Committee (FSRCC)

The Financial Services Regulation and Coordinating Committee (FSRCC) was established in
April 1994, to facilitate a formal framework for the co-ordination of regulatory and supervisory
activities in the Nigerian financial sector in conjunction with the CBN, through consultations and
regular inter-agency meetings, to address issues of common concern to regulatory and
supervisory bodies. The objectives of the Committee are to:
1. Coordinate the supervision of financial institutions, especially conglomerates;
2. Facilitate the reduction of arbitrage opportunities usually created by differing regulatory
and supervisory standards among supervisory authorities in the financial services
industry;
3. Resolution of problems experienced by any member in its relationship with any financial
institution, and bridge any information gap encountered by any regulatory agency in its
relationship with any group of financial institutions;
4. Develop the strategies for the promotion of safe, sound and efficient practices by
financial intermediaries and deliberate on such other issues as may be specified from time
to time.

The Central Bank of Nigeria (CBN)

The Central Bank of Nigeria is the apex regulatory authority in the Nigerian financial system. It
was established by the CBN Act of 1958 and commenced operations on 1st July 1959. Amongst
the CBN’s primary functions is the objective of price and monetary stability. The Bank further
formulates policies to control the amount of money in circulation, supervise financial
institutions, influence rates and credit prevalent in the economy and by extension the supply of
money in the economy. Recall;

Regulatory Instruments of the Central Bank/ Instruments of credit control

1. The Bank Rate: This is the rate at which the central bank discounts bills of exchange or lends
money to commercial banks, merchant banks, discount houses or other financial institutions. It is
also referred to as the Monetary Policy Rate (MPR) in Nigeria. The rate if interest at which
banks lend money to the public is known as the Lending Rate. An increase in monetary policy
rate by the central bank implies an increase in interest rate charged on commercial bank loans
and a reduction in the volume of money in circulation. The current MPR in Nigeria is fourteen
per cent (CBN May, 2017).
 2. Open Market Operation (OMO): This refers to the purchase or sale of government securities
(bonds, treasury bills etc.) in the open market to individuals, commercial banks and other
institutions so as to regulate the volume of cash in circulation. The sale of government securities
reduces the volume of money in circulation. On the other hand, the purchase of these securities
frees money from the central bank and increases the volume of money in circulation.
3. Liquidity or Cash Ratio (Legal Reserve Ratio): This is the fraction or proportion of liquid
assets to total deposits that a commercial bank is required by law to keep with the central bank.
An increase in this rate or ratio reduces the cash balances held by commercial banks and hence
their ability to lend. The current cash reserve ratio in Nigeria was 22.5 % (CBN May, 2017) but
has just been increased to 27.5%
4. Special deposits and Stabilization Security: Special deposits are deposits other than the
statutory required deposit (i.e. cash ratio). These deposits are also a percentage of the total
deposits held by commercial banks but different from the cash ratio. An increase in special
deposits reduces the ability of commercial banks to lend and hence the volume of money in
circulation. Interest is paid on special deposit accounts, usually at the Treasury bill rate. Special
deposits are used when the cash reserve ratio is not effective to control inflation. The central
bank may issue stabilization securities to specified institutions to mop up the excess liquidity of
such institutions and reduce money supply. Special deposits and stabilization securities are used
when other monetary policy instruments fail to achieve their targets. Thus, they are instruments
of last resort.
5. Directives (Selective Controls): These are orders or directives by the central bank to banks on
priorities to be observed in various areas of their operations. For example, credit ceilings and
measures to restrict banks’ lending or direct their loans to specific sectors.
6. Funding: This is the process of converting short-term loans in to medium or long-term loans.
The central bank does this by converting treasury bills of commercial banks in to bonds when it
finds that conditions have not improved enough for the short-term loans to be repaid.
7. Moral suasion: This is an appeal, suggestion, exhortation or expectation by the central bank to
commercial banks to check their lending habits. It is the most passive of all the central bank
tools. It is mostly used in times of inflation on the belief that banks would, on their own
initiatives and without guide or compulsion, act according to the dictates or priorities of the
economy.

Nigerian Deposit Insurance Corporation (NDIC)

The NDIC was established by Decree No. 28 of 1988 and commenced effective operations in
1989. It was primarily set up as part of the financial safety net in the banking sector to
complement the CBN in the regulation and supervision of deposit taking institutions. The NDIC
provides advice to the CBN in the liquidation of distressed banks and manages the assets of
distressed banks till they are fully liquidated. It was set up to provide deposit insurance and
related services in the banking industry, in order to foster confidence as well as provide a safety
net for depositors. The NDIC was authorized to inspect the books and operations of insured
banks and deposit taking institutions. In 1997, the NDIC Act was amended making the
corporation report to the FMF. Supervision involves the on-site examination of insured banks
and off-site surveillance to provide early warning signs of distress.

Functions of the NDIC

1. Insuring deposit liabilities of licenced banks.
 2. Giving financial assistance to deposit banks in times of financial distress.
3. Guaranteeing payments to investors in terms of liquidation.
4. Assisting in formulation of monetary policies.

Federal Ministry of Finance

The Federal Ministry of Finance was established in 1958 by the Finance Ordinance, which
accorded the Ministry with the responsibility of controlling and managing the finances of the
Federal Government. The Ministry provides advice on fiscal matters and partners with the CBN
on monetary matters and supervises the activities of the NDIC

B. Regulatory agencies of the Capital Markets

1. Central Bank of Nigeria (CBN): As with money market, the CBN is a key participant in
the capital market. Primarily, it is the apex regulatory institution in both banks and non-
banks financial institutions. It also underwrites federal government debt, by taking all
unsubscribed portion of the debt.
2. National Insurance Commission (NAICOM)
In 1997, the National Insurance Commission was founded to ensure the effective
administration, supervision and regulation of insurance business in Nigeria as well as
regulate transactions between insurers and reinsurers within and outside Nigeria.
The responsibility to set the standards for the conduct of insurance business in Nigeria
was granted to commission for proper monitoring and inspection in order to ensure
stability in the industry. It determines and approves the rates for premiums and
commissions in the insurance industry and protects policy holders and other beneficiaries
of insurance contracts.
Functions of NAICOM

i. establish standards for the conduct of insurance business in Nigeria;

ii. approve rates of insurance premiums to be paid in respect of all classes of insurance
business;
iii. approve rates of commissions to be paid in respect of all classes of insurance
business;
iv. ensure adequate protection of strategic Government assets and other properties;
v. regulate transactions between insurers and reinsurers in Nigeria and those outside
Nigeria;
vi. act as adviser to the Federal Government on all insurance related matters;
vii. approve standards, conditions and warranties applicable to all insurance business;
viii. protect insurance policy –holders and beneficiaries and third parties to insurance
contracts;
ix. publish, for sale and distribution to the public, annual reports and statistics on the
insurance industry;
x. liaise with and advise Federal Ministries, extra ministerial departments, statutory
bodies and other Government agencies on all matters relating to insurance contained
in any technical agreements to which Nigeria is a signatory;
xi. contribute to the educational programmes of the Chartered Insurance Institute of
Nigeria and the West African Insurance Institute, and carry out such other activities
connected or incidental to its other functions under the 1997 Act.

3. The National Pension Commission (PENCOM)

The National Pension Commission (PENCOM) was established to supervise, coordinate,

regulate and control the efficient and effective administration of pension matters in
Nigeria. The commission derived its powers to regulate pension activities in Nigeria from
the Pension Reform Act 2004.

The functions of the Commission include:

A. To regulate and supervise the Pension Scheme;

B. Provide guidelines for the operation and administration/ investment of pension funds;
C. Licensing pension fund administrators, supervising custodians and other institutions
dealing with pension matters;
D. Setting standards and guidelines for efficient management of pension funds under the
Act;
E. Providing a database for all pension matters;
F. Educating the public on pension related issues and how the scheme is managed;
G. Building capacity for pension fund administration; and
H. Serving as a body to investigate and resolve complaints from the public against any
pension fund administrator, custodian or employer.
4. The Chartered Institute of Stockbrokers (CIS): The Chartered Institute of
Stockbrokers (CIS) is a non-profit making organization chartered by the Act 105 of 1992.
The main function of the CIS is to regulate the conduct and practice of the stockbroking
profession in Nigeria.
5. The Nigeria Stock Exchange (NSE): The NSE is an organized secondary market for
buying and selling of securities. It is a market where those who wish to buy or sell shares,
stocks, government bonds, debenture, and other approve securities.
6. Security and Exchange Commission (SEC): SEC is the apex regulatory authority in the
Capital Market. It evolved from the Capital Issues Committee (CIC).
The Nigerian capital market is regulated by the Securities and Exchange Commission (SEC).
The agency is charged with the responsibility of providing guidelines for operation by
institutions in the capital market. Though SEC, provides the guidelines, the Stock Exchange
Market (NSE) is said to be self-regulatory as it implements, monitors and enforce standards
on market participants. The SEC was established by the SEC Act of 27th September 1979,
which was further strengthened by the SEC Decree of 1988.

Functions of SEC
 1. To register institutions in the capital market in order to boost public confidence.
2. To control the stock exchange and other institutions in the market
3. To ensure full disclosure to the public on issues pertaining debt and equity of institutions
listed on the market.
4. To investigate and sanction cases of malpractice in the market.
5. Market surveillance to check price manipulations and insider abuse by agents and
institutions.
6. To determine the price, amount and time at which a company’s securities are to be sold
either through offer for sale or subscription.
7. To monitor the activities of the Nigerian Stock Exchange trading floors in order to ensure
orderly, smooth and equitable dealings in securities.
8. To register all securities proposed to be offered for sale to or for subscription by the public
or offered privately.
9. To protect investors against misleading or inadequate information, fraud or deceit on the part
of securities.
10. To sustain and uplift the integrity and ethical standard of the security market and enhance
public confidence.
11. To create the necessary atmosphere for orderly growth and development of the capital market
through public enlightenment processes.

Tools used by the SEC for regulation

1. Full disclosure
2. Market Surveillance.
3. Fees and fines
4. Suspension and penalties
5. Litigations

Aims of financial regulation.

1. To build market confidence: Financial regulations via regulatory agencies ensure that
the confidence of the public in financial institutions is maintained. This is so because, in
the absence of which, individuals, firms and government may feel insecure to keep their
money with them.
2. To ensure financial stability: The regulatory agencies enforce the monetary policies of
government whereby maintaining financial stability in the economy.
3. To protect the consumers: The public (individuals, firms and government) is protected
from unforeseen financial losses, through the activities of regulatory agencies such as
National Deposit Insurance Corporation (NDIC).
4. To forestall financial crimes: Financial institutions are subjected to guidelines to
eliminate or discourage all forms of unethical practices in the financial system.
5. To recommend reform policies: To make recommendations as to how the operations of the
financial market could be improved to boost economic development of Nigeria

WK 5 & 6
The Demand for Money or Liquidity Preference
Money is not desired for its own sake but as a medium of exchange or trade. This implies that
money has Derived demand. The demand for money is the desire to hold money, that is, to keep
one’s resources in liquid form instead of investing it. Money being liquid means that money can
be converted into another form of wealth without cost of delay. Holding money rather than
investing it has a cost since holding money involves the loss of interest that would otherwise
have been earned. John Maynard Keynes stated that there are three motives behind the demand
for money or reasons why people prefer to hold money. These are:

 1. Transactional Motive: People desire to hold money primarily because their incomes
and expenditures do not occur at the same time. It is the need to hold money to pay for
everyday expenses, purchases of goods, services and other items or transactions such as
paying for taxi fares, etc. The transactional motive is the main reason why people hold
money and the amount of money held depends on the person’s level of income and the
interval between pay-days. The higher one’s income, the higher the amount of cash held
and the longer the interval between one pay-day and another, the greater the amount of
money held.
 Households need cash to buy food, clothing, to pay bills.
 Firms need cash to buy raw materials, pay wages, etc.
 The government needs cash to meet the daily expenditures of government offices.
Determinants of Demand for Money for Transactional Motive
The following factors affect the transaction demand for money.
1. Level of Income
An increase in income means people will hold more money for transactional motive and
vice versa.
2. Inflation
If the general price level goes up, things will generally be expensive, and more money
will be needed to buy the same quantity of goods and services.
3. Income Intervals
If people receive income after long intervals (say months instead of weeks), they need to
hold more cash for the transaction of the whole month, and hence the demand for money
for transactional motive will be high.
4. Uncertainty
In case of higher uncertainty (for example, economic instability), people prefer to hold
more cash, leading to a higher demand for money for transactional motive.
2. Precautionary Motive: This is the money which people keep with them in order for them to
meet up with unplanned expenses, unforeseen contingencies and emergencies. This is also
dependent to a large extend on the level of income one receives.
 Households keep cash for job loss, theft, accidents, unexpected family expenses, illness,
etc.
 Firms keep cash for fire, theft, accidents, machinery breakdowns, losses, etc.

3. Speculative Motive: This refers to people’s desire to hold money in order to take full
advantage of investment opportunities. It is a business motive in which people hold cash
so that they can invest in bonds and securities. This motive is based on people’s
expectation of the future trends in the interest rates and prices in the economy. The
demand for money now is inversely related to the present interest rate. Thus, at higher
interest rates now, people will keep less money and vice versa. Similarly, if people expect
the prices of some items to fall in the future, they will delay their purchases till the new
reduced price has taken effect.

Speculation means the purchase of an asset for short-term gain due to the difference between
its sale price and purchase price. Liquidity preference theory assumes that people will hold
only two forms of assets, i.e. cash and bonds.

Bonds are certificates issued by the government at a discounted rate (i.e., less than their face
value) for a long period (usually more than one year), and they have a fixed amount of
interest per annum regardless of their market price.

People expect to have certain future rewards by investing money in bonds, so they hold cash
for that purpose leading to the speculative demand for money.
Supply of Money
This refers to the amount of money which is available in an economy in sufficiently liquid and
spendable form. It can also be described as the total stock of money available for use in the
economy at a particular period of time. Money supply can be classified as either narrow (M1) or
broad (M2).

Narrow Money Supply (M1): It consists of the following: (i) Currency in circulation which is
defined as coins and paper money held outside the banking system. (ii) Checking Account
Deposits: This consists of funds deposited in banks and other financial institutions which are
withdrawable on demand, that is, demand/ current account deposits and other checkable deposits.

Broad Money Supply M2: This includes all elements of M1 plus near money - savings accounts
balances, time deposits, mutual funds and money market securities.

LIQUIDITY PREFERENCE THEORY

Liquidity preference theory refers to the determination of the interest rate by using the demand
for money and the supply of money in the money market of a country.
It is also called Keynesian liquidity preference theory.
Assumptions of Liquidity Preference Theory
Liquidity preference theory has the following assumptions:
 People and firms hold all their wealth in two ways, i.e., cash and bonds.
 Financial institutions (banking system) are well established.
 The supply of money is fixed.
 The same interest rate is charged for all types of financial assets.
 Demand for money for transactional and precautionary motives is perfectly interest-
inelastic.
  Everyone speculates.

Quantity Theory of Money

This theory seeks to establish the relationship between money supply or the quantity of money in
circulation, the general level of prices, the rate at which money circulates and the quantity of
available goods. In the early twentieth century, Irving Fisher formalized the relationship between
money and prices using the quantity equation:

MV = PT
M = money supply or currency in circulation
V = velocity of circulation of money or speed of turnover. This is the average number of times
each Naira in the money supply is used to purchase goods and services that are included in GDP.
P = price level
T = real output or quantity of goods

The theory explains that if there is an excess supply of money, that is, if economic units hold
more money than they require, they will spend the excess money on currently produced goods
and services and this would increase the price level. However, if there is excess demand over
supply, expenditure on goods and services would be reduced and this would reduce the price
level. The quantity theory holds that the imbalance between the demand for money and the
supply of money is mainly due to changes in aggregate demand for goods and services. The
value of money (PT) is determined not only by the quantity of currency in circulation but by the
rate or velocity of circulation and the quantity of goods and services available.
MV
The equation can be restated as P = . If V is assumed to be constant, and T is independent of
T
M, then an increase in M would lead to a proportional increase in P and vice versa.
Alternatively, the theory can also be explained using the mathematical rule that an equation
where variables are multiplied together is equal to an equation where the growth rates of these
variables are added together. Therefore,

Growth rate of money supply + Growth rate of velocity = Growth rate of price level (or inflation
rate) + Growth rate of real output

The growth rate of a variable is the percentage change in the variable from one year to the next.
Fisher turned the quantity equation into a theory by asserting that velocity is constant. If V is
constant, then growth rate of V will be zero. Therefore,

Inflation rate = Growth rate of money supply – Growth rate of real output

The following predictions come out of this equation:

1. If the money supply grows at a faster rate than real GDP, there will be inflation.
2. If the money supply grows at a slower rate than real GDP, there will be deflation.
3. If the money supply grows at the same rate as real GDP, the price level will be stable and there
will be neither inflation nor deflation.

Criticisms of the Quantity Theory

1. Economists argue that it is a truism, not a theory. It is simply a way of showing that there is a
relationship between the variables M, V, P and T.
2. The implication of the theory that the variables M, V, P and T are independent is unacceptable
since a change in one results in a change in any or all the others.
3. There is no such thing as a general price level since the study of price indices shows that we
have sectional price levels such as a price level for clothes, food, transport, etc.
4. It does not show how the value of money is determined but only shows how it changes.
5. The theory is inadequate as a theory of money since it does not consider rate of interest.
6. It considers only the supply of money and says nothing about the demand for money.
7. Changes in the general price level may be caused by other factors such as increase in
population or increase in money wages rather than an increase in the supply of money as the
theory states.

The Value of Money

The value of money refers to its purchasing power, that is, the amount of goods and services that
a given sum of money can buy. The value of money varies inversely with the price level. This
means that the higher the price level, the lower the amount of goods and services that a particular
unit of money can buy. The value of money which can also be referred to as the purchasing
power of money is its ability to command goods in exchange. In periods of high inflation, the
value of money goes down considerably. Money illusion is the psychological feeling that one is
better off as a result of an increase in his money income while the corresponding increase in the
price level has placed the individual at the same or worse level of welfare.

The price level is determined using the price index which is a method of compiling average price
changes for a group of goods and services. These price changes help us to determine the changes
in the value of money. There are different types of price index which are computed for various
purposes. Some common ones include: Wage index, Import price index, cost of living index,
wholesale price index, consumer price index etc.

Factors affecting the Value of Money

1. Price Level: This has an inverse relationship with the value of money. An increase in the
price level means that a given sum of can purchase fewer goods and services and vice versa.

2. The Supply of Money: This also has an inverse relationship with the value of money. If the
quantity of money in circulation increases without a corresponding increase in the quantity of
goods and services, the value of money would be low since a higher amount of money would be
required to purchase fewer commodities.

3. Velocity of Circulation of Money: This also has an inverse relationship with the value of
money. An increase in the rate at which money circulates or changes hands within an economy
results in a decrease in the value of money and vice versa.

4. Quantity or Volume of Goods and Services: The level of production or volume of goods
and services in the economy has a positive relationship with the value of money. Thus, if more
goods and services are available in the economy, the value of money would be high because
more commodities can be bought with a given sum of money.
Inflation
Inflation refers to a continuous or sustained increase in the general level of prices in an economy
over time. During inflation, there is an increase in prices generally, that is, increase in practically
all prices or increase in prices on the average not just an increase in the prices of one or few
commodities and this increase must be sustained over time. However, the price increases in
commodities do not necessarily have to be at the same rate. Governments are concerned about
inflation and they try to control it because it reduces the value of money and the spending power
of households, governments and firms. This is why the achievement of price stability or low
inflation is included as one of the broad macroeconomic goals.

The inflation rate of a country is usually calculated using the Consumer Price Index (CPI) which
measures the price changes of a representative basket of goods and services, that is, those
consumed by an average household, in the country. For example, items such as staple food,
transportation, clothing etc are likely to be included with different weights applied to reflect the
relative importance of each item in the average household’s expenditure.

Types of Inflation
1. Demand-Pull Inflation: Here, the increase in general price level of goods and services is as a
result of increase in the level of aggregate or total demand in the economy. This is usually due to
an increase in private and government spending. It is also referred to as Excess Demand Inflation
because excess of aggregate demand over aggregate supply would lead to an increase in the level
of prices. Given a fixed stock of goods, an increase in demand as a result of increase in people’s
disposable income, higher levels of employment or other factors affecting demand will lead force
prices up in the market.
2. Cost-Push Inflation: The increase in the general price level occurs as a result of higher costs
of production which leads to a fall in aggregate supply. This may be caused by demand for
higher wages by workers leading to higher prices of goods and services, increase in the cost of
raw materials, increase in rents or demand for higher profit margins by entrepreneurs which
result in higher prices.

3. Creeping Inflation: This refers to a small and slow or gradual rate of inflation which is
considered natural for stimulating production and economic growth.

4. Hyperinflation: This refers to very high rates of inflation which are out of control, meaning
that average prices in the economy are rising very rapidly. In this case, prices escalate to
unreasonable and immeasurable levels which renders money virtually useless as the purchasing
power of money falls rapidly and continuously. This kind of inflation may also be called
Runaway or Galloping inflation.

5. Money Inflation: This is due to increases in the money supply and easier access to credit
without an increase in the volume of goods and services. For example, when there is excess bank
lending, overexpansion of currency by the Central bank, availability of loans and credit cards.
6. Imported Inflation: This occurs as a result of higher import prices of raw materials which
force the costs of production to increase and result in domestic inflation. It is also the case for a
country which is heavily reliant on imports of consumer goods from other countries as inflation
in those countries would lead to higher landing prices for such goods. This would result in
inflation in the domestic economy because such goods would be sold at higher prices.

7. Stagflation: In this case, the country experiences both stagnation (economic recession or slow
economic growth), high inflation and high unemployment.

Causes of Inflation
Generally, inflation occurs when aggregate demand exceeds aggregate supply of goods and
services. It may also be as a result of increase in the supply of money. The following are some of
the reasons why inflation occurs.

1. Increase in disposable income: This may be as a result of an increase in the wages and
salaries of workers, an increase in national income or reduction in taxes. These would lead to an
increase in aggregate demand which, it not matched by increased productivity, results in
inflation.

2. Increase in government or public expenditure: If the government spends more money than
it receives in a bid to carry out development projects, there will be an increase in the amount of
money in circulation and if this is not matched by increased productivity, inflation would result.

3. Availability of black money or illegal money due to corruption or tax evasion: This
increases aggregate demand since people tend to spend these unearned monies extravagantly
especially on luxury items and this pushes up the general prices of goods and services within the
economy.
4. High Population or Rapid Population Growth: If a country has a high population or a
rapidly growing population there would be increased demand for goods and services. If this
demand is not met with increased supply of the goods and services, inflation would occur.

5. Shortage of Factors of Production: When any or all factors of production are in short
supply, for example, if there is inadequate capital or shortage of manpower, there would be a
reduction in the level of production and inflation would come about.

6. Artificial scarcity created by hoarders and speculators who deliberately reduce the supply of
goods in order to force prices up.

7. Increase in Exports: When a country produces more goods for export rather than domestic
consumption, there would be shortages in the domestic market and inflation would set in.

8. Low or Decreased Domestic Productivity: If the level of production in the economy is low
or if it declines for any reason such as strike action by workers or trade unions clamoring for
higher wages, poor infrastructure, unfavourable climate, natural disasters, poor storage of
products, use of obsolete technology etc, shortage of supply relative to demand will occur,
leading to inflation.
9. War and Civil Unrest: During periods of war, the focus of the government and people would
be on the production and acquiring of war equipment. In the process, the production and supply
of essential commodities would decline and this would lead to inflation. In addition, the
government may print more money to finance the war and with this increased money supply
without an increase in the supply of goods and services, inflation would come about.

10. Excessive Bank Lending: When banks create excess credit by granting loans and other
credit facilities, it leads to an increase in the supply of money. If this level of supply of money is
not matched by increase in the supply of goods and services, inflation would occur.

11. Decrease in Imports: Government sometimes try to control imports through several
measures such as outright ban, quotas, tariffs, etc. This might lead to a shortage of raw materials
for domestic industries or a shortage of essential commodities since the local production is
insufficient to satisfy local demand. This would result in inflation.

Effects of Inflation
Inflation has both desirable and undesirable effects. Some of the desirable effects include:
1. Increase in profits and earnings of business people since the higher prices of goods and
services gives them higher profits and revenues. Flexible income earners and profit earners gain
during inflation because they can always increase their income ahead of and during inflationary
periods.
2. Increased employment opportunities which occurs as a result of business expansion which is
encouraged by mild inflation.
3. There will be increased investment by business people who wish to produce more in order to
gain more profit from the rising prices of goods and services.
4. Inflation reduces the burden of the national debt since the real value of money which the
government borrowed falls.

However, inflation is undesirable for the following reasons:

1. Inflation brings suffering to fixed income earners such as pensioners and fixed salary earners
because the amount of goods and services which their money income can purchase would
progressively decline. Inflation thus redistributes income.
2. Inflation diminishes the real value of savings because the money which has been saved is
worth less than before. This discourages individuals, firms and governments from saving and
makes people prefer to keep their wealth in real assets as opposed to money. This is referred to
as hedging.
3. Borrowers (debtors) gain during inflation while lenders (creditors) lose. This is because even
though the debtor pays back the same amount in money terms, in real terms, the amount paid
back is worth less than before. This is especially the case for debtors who pay rent or fixed
interest
4. Inflation leads to loss of confidence in money since the value of money declines during
inflation.
5. Inflation reduces the purchasing power of consumers which implies a fall in their real income
because money is worth less than before. As the cost of living increases, people would require
more money to purchase the same basket of goods and services.
6. Inflation leads to adverse or unfavourable balance of payments because it makes imports
relatively cheaper and exports relatively more expensive. Inflation thus encourages imports and
discourages exports, worsening the country’s balance of payment position.

Ways of Controlling Inflation

Inflation can be controlled by policies and measures which reduce aggregate demand, increase
aggregate supply or reduce the volume of money in circulation. Some of these measures include:

1. Restrictive Monetary Policy: The Central Bank can adopt measures to control the quantity of
credit in the economy by increasing the bank rate, selling securities in the open market,
increasing the legal reserve requirement, use of special deposits, directives to commercial banks
to reduce their lending, moral suasion, funding and other measures to restrict credit in the
economy. These measures are collectively referred to as restrictive monetary policies. These
measures help to reduce the money in circulation and aggregate demand.

2. Fiscal Policy: Fiscal policy entails the use of government revenue and expenditure to regulate
the economy. This can be done through:
(i) Reduction in government expenditure which reduces the amount of money flowing into the
economy which reduces aggregate demand and curbs inflation.
(ii) Increase in taxes – personal, corporate and commodity – in order to reduce disposable
income and aggregate demand and curtail inflation.
(iii) To increase the supply of goods within the country, the government can reduce import duties
and increase export duties. These would increase aggregate supply and reduce inflation.
(iv) Government providing subsidies to local producers in order to boost domestic supply of
goods.
(v) Government can increase its borrowing from the public by issuing government securities
such as bonds, stocks and treasury bills. By purchasing them, people pay money to the
government. This reduces the amount of money they hold, reduces aggregate demand and checks
inflation.

3. Physical Controls: These are direct measures which help to reduce inflation. They may take
the form of directives on wages, prices and salaries or the government establishing bodies to
control the supply of goods and services.
(i) Increase in savings on the part of the people: This will tend to reduce disposable income
with the people and reduce personal consumption expenditure.
(ii) Increase in the production of goods and services, especially, increase the production of
essential consumer goods like food, clothing, etc. and increase in the importation and supply of
essential raw materials to be used for production. This would increase the aggregate supply.
(iii) Government can introduce price controls to directly check inflation. By fixing a maximum
price above which it is forbidden to sell, there would be an increase in aggregate demand.
(iv) Rationing: Here, the government distributes scarce goods so as to make them available to a
large number of consumers or restricts the maximum quantity of commodities that can be
purchased by each consumer. This is commonly the case with essential consumer goods.
(v) Wage Freeze and Wage Control: Government can place a limit on the amount which firms
are allowed to pay their workers and wages can be prevented from rising except after a rise in
productivity.
(vi) Improving the distribution system by providing more transport infrastructure so that goods
can be made more easily available where they are required.

Deflation
This is the continuous and persistent fall in the general price level in an economy over a period
of time. Deflation leads to an increase in the value of money as a given sum of money can
purchase more goods and services. Deflation usually occurs in times of economic crisis such as
slumps, recessions and depressions where there are low or falling levels of aggregate demand or
when the quantity of money in circulation falls drastically. However, when the government
deliberately causes falling prices, this situation is called disinflation.

Causes of Deflation
1. Low incomes leading to low aggregate demand and lower price levels.
2. Reduction in government expenditure which reduces the amount of money in circulation.
3. Overproduction of goods and services which result in lower prices.

Effects of Deflation
1. Falling prices of commodities reduces the profit margins of producers.
2. It leads to greater unemployment of factors of production especially as workers are laid off.
3. During deflation, lenders (creditors) gain while debtors (borrowers) lose because the value of
money increases. Hence, in real terms, debtors pay more than they borrowed.
4. Fixed income earners also gain since there is an increase in the real value of their income.
5. Exports become relatively cheaper while imports become relatively more expensive. This
improves the country’s balance of payment position.
6. The burden of national debt will increase since the government will pay more in real terms
than what was borrowed.
7. Profits of business people would decrease, leading to a fall in investment.

Measures to Control Deflation

1. Fiscal Policy: In order to revive an economy in a state of deflation, government can use fiscal
policy measures such as:
(i) Reduction in taxes in order to increase disposable income and aggregate demand.
(ii) Increase in government expenditure on development projects. This would increase the
amount of money in circulation.
(iii) Government borrowing less from the public, leading to an increase in disposable income.

2. Expansionary Monetary Policy: Expansionary monetary policy seeks to increase the credit
available in the economy. This can be achieved by: reduction in bank rates, reduction in legal
reserve requirements, central bank purchasing government securities, reduction in special
deposits, directives for commercial banks to increase lending. These measures increase the
money supply and reduce deflation.

3. Government can increased the wages and salaries of public servants and encourage private
enterprises to do the same for their employees. This would increase the purchasing power of the
people and aggregate demand.
WK 7
ECONOMIC LESSONS FROM ASIAN TIGERS, JAPAN, EUROPE AND AMERICA

The Asian Tigers

The Asian Tigers is a league of nations in South East Asia made up of Hong Kong, Taiwan,
South Korea and Singapore. The economic revolution of the bloc started in 1960 through 1990’s.
Having realized the potentials of their economies and the consequences of neo-colonialism, the
Tigers started investing heavily in education and infrastructure. Education particularly was
viewed as a driver that will tap deep into the endowed natural resources of those economies. By
1965, all the Tigers achieved universal primary education. South Korea particularly achieved
secondary education rate of 88% in 1987.

The economic policies of the Tigers were export oriented (import restrictive and export driven).
Tariffs on consumer goods were increased while those on producer goods were reduced. Foreign
direct investment (FDI) was encouraged through rapid development of infrastructure. FDI +
increased investment in the real sector (by the government and private sector) resulted in import
substitution and diversification. Stable macroeconomic management and policies (budget deficit,
external debt and exchange rate) led to factor accumulation and eventually the development of
the financial markets in Singapore and Hong Kong.

The Asian Tigers sustained economic growth rate of 7.5% per annum for three decades starting
from 1960. According to the World Bank report, the shocking growth (also known as the Asian
Miracle) was a result of fiscal stimulus resulting from government intervention through export
push strategy, factor accumulation and macroeconomic management. This again contrast the
classical dogma of ‘no government intervention in economic activities’ an ideology pursued by
capitalist economies until the intervention of Keynes during the economic depression of the
1930’s.

The economic progress of the Tigers has made many developing economies to build their
economic models around the history of the tigers. Countries such as Malaysia, Indonesia,
Philippines, Thailand and Vietnam are now dubbed the Tiger Cubs. The combined economy of
the Asian Tigers hit 3.81% of the world economy in 2013.

The four Asian Tigers (Hongkong, Taiwan, Korea and Singapore) have been the fastest growing
countries in the world for the past three decades.
COMMON CHARACTERISTICS OF ASIAN TIGERS

 Focus on exports: Where as other developing countries use import substitution strategies
for economic development, the Asian tigers focused on export oriented industrial
development to richer countries. Domestic production was discouraged through
government policies such as high tariffs. also trading the surplus with the richer countries
 Human capital development – they developed specialized skills for their personnel in
order to improve productivity
 They had an abundance of cheap labour
 Sustained rate of high growth rates (probably double digits) for decades
 Non democratic and relatively authoritarian political systems during the early years
 High tariffs on imports in the early days
 Undervalued currencies
 High saving rate

A case of Singapore in particular between 1966 and 1990, the economy grew at remarkable 8.5%
per annum, 3 times faster than that of the US growth, per capita income grew at 6.6% rate
roughly doubling every decade. This achievement seems to be the kind of economic miracle. The
employed share of the population surged from 27% to 51%. The educational standards of that
workforce were dramatically upgraded. Also the country grew awesome levels of physical
capital, investment as share of output rose from 11% to more than 40%.

FACTORS THAT ENGINEERED THE ROBUST GROWTH IN ASIAN ECONOMIES

Although consensus has not yet been reached by different scholars/researchers and policy
makers, the following are the mostly argued to be the factors behind the Asian tigers growth;

Skilled labour force: In the 1960s these nations were poor and had abundance of cheap labour.
This excess labour was absorbed by labour intensive industries. Eg in 1965 Korea industry sector
only employed 9.4% as opposed to 21.6% in 1980 yet agriculture employment fell from 58.6%
to 34% over the same period. The excess labour was transformed into productive workforce
through the education reform and yet remained competitively cheap. The focus was placed on
education at all levels, all children attending elementary education and compulsory high school
education. Money was also spent on improving college and university system.

Capital accumulation: With respect to physical capital, the reasons can primarily be traced to
the high savings rates. Policies also probably played a significant role in increasing the
investment rate of the economy (High savings rates do not automatically translate into high
domestic investment rates but nevertheless, the high savings rates have led to high domestic
investment rates in Taiwan for example).As much as capital accumulation was key to the growth
of these countries, capital productivity (recall labor transferred to industrial sector was
accompanied with education reforms to add to its productivity) was essential. Capital
productivity was attained through adopt foreign knowledge and technology. The technological
catch up coupled with capital accumulation was significant to the Asian tiger’s growth.

Note For most researchers they argue that factor productivity (labour should be enhanced with
education and capital enhanced with technological progress) is key for economic growth.
Outward oriented strategies/policies: The more rapid growth can be growth can be associated
with much greater openness. Both exports and imports grew about twice as fast in the Asian
economies as they did in the latin America. Asian economies maintained much high ratios of
exports and imports to GDP. In hongkong and Singapore openness was achieved by ending all
restrictions on imports and giving free rein to export sector. In Japan and Korea, and Taiwan,
trade barriers were initially during the early 1970s however, the tariffs were gradually reduced.
Among the tactics used in different countries were: exchange rate policies to favor exporters,
export incentives, and selective tariff protection; financial repression, slowing financial sector
development and consumer lending to provide cheap financing to industry – for exports, and for
key industries; a high level of consultation between bureaucrats and business – both individual
companies and industry groupings.

Slow growth rates of population: This played a great role in reducing family sizes (dependency
ratios), creation of an educated labour force, accumulation of household and government
savings, rise in wages and impressive growth of investments in manufacturing technology. 1965
each of the Asian tigers established family planning programmes and as a result fertility
declined. Emphasis was also placed on civil education, increasing the rate of entry of women
into the workforce and education sector; leading to delayed marriages. By 1995, the average
fertility level was an average of two children per family (couple). Compare it with the Uganda’s
current fertility rate of 6.7 births per mother. Smaller families produced 3 major demographic
changes; slowed growth in the number of school-age children, a lower ratio of dependants to the
working age adults and a reduced rate of labour force growth.

Ethnic homogeneity: Most of these Asian tigers had largely homogeneous ethnicity e.g. 98% of
the Taiwan’s population is Han Chinese. Most researchers argue that ethnic homogeneity is
beneficial with respect to creating institutions that are conducive to economic growth. Ethnic
fragmentation leads to lower public expenditure on schooling, worse financial institutions, and
lower spending on infrastructure. Also lower transactions are associated with ethnicity
homogeneity.

Culture and Religious beliefs: Racial and religious harmony is regarded by the government as a
crucial part of Singapore's success and played a part in building a Singaporean identity. Due to
the many races and cultures in the country, there is no single set of culturally acceptable
behaviours. Buddhism is the most widely practiced religion in Singapore, with 33% of the
resident population declaring themselves adherents at the most recent census. The religious
beliefs of Singapore, hard work, innovativeness coupled with their culture of openness and harsh
punishments for criminal offences led to a corruption free economy.

Flying Geese Hypothesis: In this case, countries in East Asia aligned successively behind the
developed or advanced industrialized countries in their order of different stages of growth in the
wild geese flying pattern. In this pattern the leading goose pattern is Japan, the second tier of
countries are four tigers (Hongkong, Korea, Singapore, and Taiwan) whereas the third 3 rd stage
consisted of countries such as Indonesia, Thailand, and Malaysia).China and Vietnam served as
the rear guard in the formation. The “flying geese” hypothesis predicts as labor cost surges in
one economy, firms tend to move their investment to the less developed neighbouring countries
or regions to take advantage of lower wage rates. In the recent East Asian economic history, the
phase of flying geese lasts less than two decades. The New Industrializing Economies (South
Korea, The Taiwan, Singapore and Hong Kong) absorbed most of the Japanese investment in the
1960s and 1970s when the production cost in Japan rocketed up E.g. in the early years Japan
influenced most of these countries like Taiwan after the 2 nd world war and these countries
adopted the Japanese economic model of economic development. E.g. China external trade
development council and the bureau of industrial development were based on the Japanese
models. Japan beyond being major trading company with developed countries, it became a major
trading company with the Asian tigers e.g. under the policy of agriculturising Taiwan and
industrialization of Japan, the Japanese heavily invested in Taiwanese agriculture.

Knowledge driven economy: It was realized that there is need for research and development if a
country was to grow to economic maturity. The Asian Tiger governments committed to
improving research and development. E.g. in Malaysia the research activity was/is determined by
the needs of the industry including the needs of Small & medium industries. Even in these
countries, the skills focus was professional and managerial occupational skills, research skills,
professorship skill and technical skills. The industries became knowledge driven industries and
e.g. in Singapore gradually 2 out of 3 jobs were for knowledged and skilled workers in
manufacturing sector and 3 out of 4 of the export services sector. Investment in R&D meant that
evidence advised policy decision making in these countries.

Effective and stringent public policies: This consisted of credible macro-economic policies
that kept inflation low, interest rates low, fiscal policies that focused on raising saving rates and
investment rates, as well as policies that enhanced the development of infrastructure. These
factors consequently promoted private investment and growth. For example, in Singapore despite
the lack of natural resources and the absence of a large domestic market, high growth rates and
eventually development were realised. This remarkable success has been attributed largely to
sensible and effective policies and the early attention paid to Singapore’s infrastructure
Politically, many of the tiger economies have a recent history of military rule. However, a
number of them have liberalized in recent years and Taiwan, Thailand, and South Korea are now
amongst the most democratic countries in Asia. This political liberalization may make it more
difficult for the tiger governments to resist demands to expand the size of their higher education
systems still further. This kind of political system gives government the leverage to meet its
development goals according to what it considers priorities as opposed to a democratic system
where issues of equity, gender, ethics, etc are paramount.
Pegging performance to milestones
Much has been written about pegging remuneration to performance in the business world. The
unique feature of the Singapore system is that public service remuneration was pegged to
performance which was benchmarked against the milestones that had been agreed upon by the
agencies and the parent ministries. At the highest levels, political office holders and senior public
servants had their salaries pegged to economic performance and the salaries of the top echelons
of a group of key professional classes. At the lower levels, compensation was pegged against
performance against milestones.

Quality and standardization: Emphasis was placed on production of high quality standardized
goods that would compete at the global level. Experts on Standardisation and quality assurance
were brought in from Japan, US and UK.

THE JAPANESE MIRACLE

The Japanese Miracle refers to Japan’s phenomenal economic recovery following the devastation
of the World War II. Within short decades of its capitulation Japan had joined the community of
prosperous nations.

LESSONS FOR THE NIGERIAN ECONOMY

For Nigeria to be industrialized the following must be drawn from the Asian Tigers

1. Import substitution

2. Education and infrastructure

3. Repositioning of the banking system

4. Restructuring and diversification of the productive base of the economy.

5. Effectively managed exchange rate system

6. Elimination of corruption and outright looting of government treasury. (Zero tolerance for
corruption)

7. Creation of employment opportunities for the teeming population.

8. Reduce the bargaining power of labour unions.

9. Reduce the debt to GDP ratio and ensure fiscal and balance of payment viability.

WK 8
HUMAN CAPITAL DEVELOPMENT
Human capital is the total competencies, knowledge, social and personality attributes by labour
to produce economic value. In other words, it is the aggregate economic view of what labour
does in the economy.
Physical capital on the other hand are non-human assets created by man to aid the production
or manufacture of goods and services.
HUMAN CAPITAL DEVELOPMENT
What is the relationship between physical capital and human capital?
Characteristics/Features of Human Capital
1. It is mobile both geographically and occupationally
2. It has feelings and must consent before it is used.
3. It is skilful through education and training.
4. It is unpredictable
5. It is not fixed in supply
6. It is perishable
7. It has initiatives i.e. act on its own.
Factors Affecting the Efficiency of Human Capital
1. Education and training.
2. Experience
3. Competence
4. Skills
5. Social attributes e.g. conditions of service.
6. Good health.
7. Innovation.
Differences between human capital and Physical capital
Human Capital Physical Capital
1. Human assets Non-human assets
2. Controlled by themselves Cannot control themselves
3. Appreciate in physical value Depreciates in physical value
4. Rewards are wages and salaries Interest
5. Acquired through formal education Acquired through direct purchase.
6. Has feelings Has no feelings

Human Capital Formation & Human Resource Management.

Human Capital Formation deals with the transformation of raw human resources into highly
productive human resources. It is the process of acquiring and increasing the number of persons
who have the skills, education and experience which are critical for the economic and the
political development of the country. The inputs needed for this transformation are education
and training, good health and moral values.
Human resource management on the other hand is concerned with the development,
maintenance and utilization of competent human force to achieve the goals of an organization in
an effective and efficient manner.
In order to develop various sectors of the economy, a country should introduce manpower
planning which indicates planning of human resources for meeting the development needs of
the economy.

Task 2: Read the features of human resource management on pp347 of essential economics.

Importance of Human Capital

1. Provision of personnel
2. Production of goods and services

3. Operation of machines.

4. Basic input in all the factors of production.

5. It enhances productivity and ensure profitability.

Brain Drain

Brain drain is basically the emigration of people with technical skills to other countries owing to lack of
opportunities in their own countries. Brain drain is common between developing countries and their
colonial masters or the developed world.

Types of Brain Drain

1. Organizational Brain Drain: Flight of talented, creative and highly trained employees from one
organization to another.

2. Geographical Brain Drain: Movement or flight of highly trained individuals from one region or
country to another.

3. Industrial Brain Drain: Movement of traditionally skilled workers from one sector or industry to
another.

Factors Responsible for Brain Drain

1. Poor working conditions

2. Poor opportunities.

3. Political instability.

4. Underdeveloped economy.

5. Better living conditions.

6. Family influence.

7. Personal reasons.

8. Ambition of an improved career

 How to arrest Brain Drain

1. Provision of better job opportunities.

2. Improvement on the universities.

3. Provision of attractive salaries.

4. Provision of adequate research facilities.

5. Development of social and economic infrastructure.

6. Eradication of corruption.

7. Improvement on security.

Human (Capital) Development Index (HDI)

The Human Development Index (HDI) is a statistic developed and compiled by the United
Nations to measure the various countries' levels of social and economic development. It is
composed of four principal areas of interest: mean years of schooling expected years of
schooling, life expectancy at birth, and gross national income per capita. This index is a tool used
to follow changes in development levels over time and to compare the development levels of
different countries.

The HDI was created to emphasize that people and their capabilities should be the ultimate
criteria for assessing the development of a country, not economic growth alone. The HDI can
also be used to question national policy choices, asking how two countries with the same level of
GNI per capita can end up with different human development outcomes. These contrasts can
stimulate debate aboutgovernment policy priorities.
The Human Development Index (HDI) is a summary measure of average achievement in key
dimensions of human development: a long and healthy life, being knowledgeable and have a
decent standard of living. The HDI is the geometric mean of normalized indices for each of the
three dimensions.
The health dimension is assessed by life expectancy at birth, the education dimension is
measured by mean of years of schooling for adults aged 25 years and more and expected years of
schooling for children of school entering age. The standard of living dimension is measured by
gross national income per capita. The HDI uses the logarithm of income, to reflect the
diminishing importance of income with increasing GNI. The scores for the three HDI dimension
indices are then aggregated into a composite index using geometric mean. Refer to Technical
notes for more details.

The HDI simplifies and captures only part of what human development entails. It does not reflect
on inequalities, poverty, human security, empowerment, etc. The HDRO offers the other
composite indices as broader proxy on some of the key issues of human development, inequality,
gender disparity and poverty.

A fuller picture of a country's level of human development requires analysis of other indicators
and information presented in the statistical annex of the report.

Key Takeaways

 The HDI is a measurement system used by the United Nations to evaluate the level of
individual human development in each country.
 The HDI uses components such as average annual income and educational expectations
to rank and compare countries.
  The HDI has been criticized by social advocates for not representing a broad enough
measure of quality of life and by economists for providing little additional useful
information beyond simpler measures of the economic standard of living.

Understanding the Human Development Index (HDI)

The Human Development Index (HDI) was established to place emphasis on individuals, more
precisely on their opportunities to realize satisfying work and lives. Evaluating a country's
potential for individual human development provides a supplementary metric for evaluating a
country's level of development besides considering standard economic growth statistics, such as
gross domestic product (GDP).

WK 9

Petroleum and The Nigerian National Petroleum Corporation (NNPC)

Petroleum was discovered in commercial quantity in 1956 by shell BP at Oloibiri in the present
River State. Ever since 1976 till date, petroleum has remained the major source of government
revenue in Nigeria.

POSITIVE CONTRIBUTIONS OF PETROLEUM TO NIGERIA ECONOMY

1. Petroleum serves as sources of revenue to the country.
2. Employment generation e.g. petroleum engineers, geologists, chemical engineers etc.
3. Improvement in the infrastructure of the country e.g. flyovers, airports roads development
are linked to earning from petroleum.
4. The major foreign exchange earnings in the country is crude oil. Therefore, petroleum
serves as source of foreign exchange.
5. Development of oil related industries e.g. oil servicing firm, petro chemical industry.
6. Improvement of the living standard of the citizens of the country.
7. Provision of wide range of products.
8. Major source of fuel e.g. petrol, diesel, kerosene etc.
9. Repositioning of the country in the global politics.

NEGATIVE EFFECTS OF PETROLEUM IN NIGERIA

1. Environment pollution e.g. Niger Delta area with land and air pollution.
2. Inflation – since the discovery of oil in Nigeria prices of goods and services have been
Skyrocketing.
 3. Neglect of Agriculture – prices of food stuff in the market are so dear due to neglect of
agricultural sector which used to be the major source of revenue for the government.
4. Increase in crime rate – emergence of advance fee fraud known as 419, Cybercrime,
Armed robbery, pen robbery are traceable to emergence of oil.
5. Civil Unrest – Breakdown of law and order in Niger Delta, coupled with kidnapping of
oil workers for ransom had turned the country to a no go area.

Nigerian National Petroleum Corporation (NNPC)

This is a body established in 1977, responsible for the development and management of
Nigeria’s petroleum resources with respect to exploration, production and refining as well as
distribution and foreign marketing of crude oil and petroleum products.
Roles of NNPC
1. It regulates the activities of the oil companies in Nigeria
2. It is responsible for oil exploration in Nigeria
3. NNPC is responsible for sinking and controlling state owned oil wells
4. It supervises the refining of petroleum for petrol, diesel and kerosene
5. It is organ of government for the distribution and marketing of petroleum products eg. Petrol,
kerosene, diesel and cooking gas.
6. Oil policy implementation
7. Employment generation
8. Manpower development
How NNPC can achieve internal economies scale
1. Establishment of training institutes
2. Use of modern technology
3. Provision of welfare facilities
4. Establishment of research laboratories
5. Employment of managerial experts

ORGANISATION OF PETROLEUM EXPORTING COUNTRIES

The Organization of the Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq,
with the signing of an agreement in September 1960 by five countries namely Islamic Republic
of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. They were to become the Founder Members
of the Organization.
 These countries were later joined by Qatar (1961), Indonesia (1962), Libya (1962), the United
Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Gabon (1975), Angola
(2007), Equatorial Guinea (2017) and Congo (2018).
Ecuador suspended its membership in December 1992, but rejoined OPEC in October 2007.
Indonesia suspended its membership in January 2009, reactivated it again in January 2016, but
decided to suspend its membership once more at the 171 st Meeting of the OPEC Conference on
30 November 2016. Gabon terminated its membership in January 1995. However, it rejoined the
Organization in July 2016. Qatar terminated its membership on 1 January 2019. This means that,
currently, the Organization has a total of 14 Member Countries. OPEC member countries
accounted for an estimated 44 percent of global oil production and 81.5 percent of the world's
"proven" oil reserves,
Aims and Objectives of OPEC
1. To maintain stability of oil price
2. To ensure steady supply of oil
3. Encouragement of exploration and development of petroleum resources
4. Stabilization of oil income for member states
5. Coordination of petroleum policies
6. Allocation of production quota
7. Increase control of the industry in the world
Achievements of OPEC
1. Establishment of common fund
2. Regulation of the supply chain via production quotas
3. Regulation of price for petroleum products
4. Encouragement of oil exploration
5. Development of global policies of oil
Problems of OPEC
1. Internal leadership rivalry
2. Competition by non-OPEC nations, eg. USA, UK, Norway etc.
3. Disloyalty of member nations on price fixing, production quotas etc.
4. Fall in the prices of oil
5. Political disagreement between member nations
6. Emergence of alternative power sources
Solutions to OPEC problems
1. Imposition of penalties for erring members
2. Strengthening of unity among its members
3. Fixing of production quota
4. Rotation of leadership positions

WK 10
INTERNATIONAL TRADE

Meaning: International or foreign trade is the trade between two or more countries e.g. trade between
Nigeria and the rest of the world,
Difference between Domestic Trade and Foreign Trade.
Domestic Trade is the trade within a country while foreign trade is the trade between or among countries.
Other differences include:
1. Use of foreign currencies in international trade.
2. Trade restrictions through bans, quotas, tariffs in international trade.
3. Huge transportation cost in foreign trade.
4. Free mobility of factors of production in domestic trade.
5. Language and custom differences.
6. Differences in legal systems.
7. Differences in measurement of weights.

Reasons or Basis for International Trade

1. Differences in environment and endowment between countries e.g. climate, soil fertility, natural
resources, capital stock, labour skills.
2. The need to satisfy various human wants.
3. The need to create wider markets.
4. Variation in the cost of production between countries.
Barriers to International Trade
1. Language problem
2. Problem of distance
3. Numerous documents
4. Differences or fluctuation in currency
5. Tariff – This makes imported goods more expensive.
6. Religion and cultural differences.
7. Artificial barriers e.g. ban, quota, or the use of license
8. Transport and Communication problem.
9. Government policy.

ADVANTAGES OF INTERNATIONAL TRADE

International trade has enormous advantages among which are:
1. International trade generates the exchange of goods and services among the nations of the world to
mutual advantages of all participating countries.
2. Promotion of economic development.
3. International trade provides employment opportunities.
4. It enhances international specialization.
5. It leads to increase in world output.
6. International trade promotes friendship among nations of the world.
7. International trade increases the standard of living.
8. It fosters – equitable distribution of national resources.
9. Countries are able to acquire skills and ideas.

DISADVANTAGES OF INTERNATIONAL TRADE

1. International trade can lead to dumping of goods into less developed countries by multinational
companies from the developed nations.
2. This development above affects infant industries adversely.
3. International trade if not checked can destroy the cultural values of a country. E.g use of mini skirt
from America is anti-cultural and against our social norms.
4. Through international trade, harmful or dangerous goods can be imported into a country by
unscrupulous business men.
5. Deficit may arise, which affects the country adversely.
6. Where dumping is highly prevalent, it may lead to unemployment.
7. Reduction of effort to attain self-reliance.
8. The developed countries may use their position to exploit the less developed ones.

THEORIES OF INTERNATIONAL TRADE

Defining Absolute Advantage- (Adam Smith)

A country has an absolute advantage in the production of a good when it can produce it more
efficiently than other countries.
Absolute advantage refers to the ability of a country to produce a good more efficiently than
other countries. In other words, a country that has an absolute advantage can produce a good
with lower marginal cost (fewer materials, cheaper materials, in less time, with fewer workers,
with cheaper workers, etc.). Absolute advantage differs from comparative advantage, which
refers to the ability of a country to produce specific goods at a lower opportunity cost.

A country with an absolute advantage can sell the good for less than a country that does not have
the absolute advantage. For example, the Canadian economy, which is rich in low-cost land, has
an absolute advantage in agricultural production relative to some other countries. China and
other Asian economies export low-cost manufactured goods, which take advantage of their much
lower unit labour costs.

Imagine that Economy A can produce 5 widgets per hour with 3 workers. Economy B can
produce 10 widgets per hour with 3 workers. Assuming that the workers of both economies
are paid equally, Economy B has an absolute advantage over Economy A in producing widgets
per hour. This is because Economy B can produce twice as many widgets as Economy B with the
same number of workers.

Absolute Advantage: Party B has an absolute advantage in producing widgets. It can produce
more widgets with the same number of resources than Party A.

If there is no trade, then each country will consume what it produces. Adam Smith said that
countries should specialize in the goods and services in which they have an absolute advantage.
When countries specialize and trade, they can move beyond their production possibilities
frontiers, and are thus able to consume more goods as a result.
Theory of Comparative Advantage
The theory of comparative advantage states that countries derive mutual benefit when they engaged in
the production of goods and services in which they have the least opportunity cost or the greatest
advantage. The principle is hinged on the idea of division of labour and specialization. This principle
was propounded by David Ricardo.
Illustration: To illustrate the principle, consider the following assumptions:
1. Two countries
2. Two goods
3. No transportation cost
4. No change in technology
5. Labour is the only factor of production

Case I: No specialization (and no Trade)

Country Cost of Output Opportunity
Production Garri Cocoa Cost
(labour hours)
Nigeria 10 10 bags 150 bags 10G=150C i.e. 1G=15C
& 1C=1/15

India 10 100 bags 20 bags 100G=20C i.e. 1G=1/5C

& 1C=5G

Case II: With specialization (and no Trade)

Country Cost of Output
Production Garri Cocoa
(labour hours)
Nigeria 10 - 300 bags
 India 10 200 bags -

Total 200 bags 300 bags

Case III: Specialization (and Trade) If the terms of trade are such that 1G=1C
Country Cost of Output
Production Garri Cocoa
(labour hours)
Nigeria 10 80 bags 220 bags

India 10 120 bags 80 bags

Total 200 300
From the three cases above, the following could be deduced
1. There is increase in world output.
2. There is improved standard of living.
3. There is efficient allocation of the world productive resource as a result of specialization.
Limitations of the Comparative Cost Theory
1. There are more than two commodities in the world
2. There are more than two countries in the world
3. The efficiency of the countries of the world varies
4. There are other factors of production other than labour.
5. The cost of production in the world cannot be the same.

Terms of Trade
Terms of trade may be defined as the rate at which a country’s exports is exchange for its imports.
Terms of trade (TOT) = index of export price/index of import×100
If TOT>100=favourable TOT
Similarly if TOT<100=unfavourable TOT
Reasons for the Worsening TOT
1. Export of primary products
2. Huge import of capital goods
3. Production of low quality products

Ways of Improving TOT

1. Use of inflationary policies.
2. Appreciation of the currency.
3. Reduction in the demand for imports.
4. Collective bargaining.
5. Imposition of higher export duties.

Commercial Policy
A country's commercial policy includes the use of tariffs and other trade barriers, such as restrictions on
what goods to be imported or exported, and which countries are allowed to import or export goods to the
home country.
Objectives of Commercial Policies.
1. Increase the volume of trade with other countries
2. Encourage domestic industries by preserving essential raw materials.
3. Stabilization of foreign trade
4. To encourage import of capital goods to speed development
Instruments of Trade Restrictions
1. Import duties or tariffs : These are taxes on imports from other countries and foreign
markets. Here, the government imposing the tariff is looking to restrict imports of foreign
goods and services, protect its own industries and companies manufacturing such items
and raise tax revenues. Tariffs could be specific in which there is a fixed tax rate or fee
for each unit of a product or commodity brought into a nation. There are also ad valorem
tariffs which are set as a proportion of the value of the imported product.
2. Antidumping policies: Antidumping policies are enacted by a nation in order to prevent
the sale of goods in a foreign market at a price far below their production costs in order to
gain a substantial share of that nation’s market. Anti-dumping rules can also include
regulations prohibiting the sale of goods, products, or commodities below its fair market
value
3. Devaluation/foreign exchange control/currency manipulation: It can be used to make
a nation’s product cheaper abroad by lowering the value of its currency in the foreign
exchange markets. This will cause the price of imports to rise while lowering the cost of
its exports. This will help a nation, whether developed or developing, increase the
opportunity to sell its products and goods in foreign markets.

4. Embargo: This is a policy in which the import or export of designated product is completely
banned or prohibited.
5. Import quota: Quotas are direct restrictions on the number of certain goods, products, and
commodities that may be permitted to be imported into a nation. This import quota is generally
enforced by the issuance of import licenses to a certain group of persons or companies.
6. Excise duties reduction
7. Subsidies: Government subsidies can come in various forms. Generally, they may be direct or
indirect. Direct subsidies provide businesses with cash payments. Indirect subsidies come in the
form of special savings such as interest-free loans and tax breaks. When exploring subsidies,
government officials may choose to provide direct or indirect subsidies in the areas of
production, employment, tax, property, and more.
Why Trade Protectionism occurs

There are numerous reasons why a nation would adopt a trade protectionist policy. They are
generally regarded as government intervention since it is a government that has control over
 its borders and the flow of goods, products, and commodities in and out of a country. They
include:

1. Protecting jobs and industries: Protecting jobs and industries is a political argument for
trade protectionism from the viewpoint that protecting worker’s livelihood and the
industries and the firms that employ them are vital to a nation’s economic growth and
well-being. This will eventually result in the loss of jobs, rising unemployment, and
eventual decrease of a nation’s gross domestic product (GDP).
2. National security: National security is used for trade protectionist policies since the
industries involved include defense-related companies, high-tech firms, and food
producers. The argument here is that industries such as aerospace, advanced electronics,
and semi-conductors are vital components of national defense policy and that relying on
foreign manufacturers would seriously affect a nation’s defense in time of war
3. Consumer Protection: Protecting consumers from unsafe imported products is an
argument used by policymakers to restrict trade. Consumer advocates, domestic
manufacturers, and certain policymakers claim that foreign-made goods may fail to
follow requirements for product safety in the manufacturing and distribution process.
This could result in serious illness, unsafe products, and even possibly death of the
consumer.
4. The infant industry argument: This idea states that new manufacturers have an extremely
difficult time competing against well-established, well-funded, extremely profitable
companies in developed countries. New manufacturers in developing nations may not
have the economic and financial resources, as well as the technology, physical
equipment, and research and development expertise to compete against older, established
firms.

GLOBALISATION

Globalization is a process of interaction and integration among the people, companies, and
governments of different nations. It is a process driven by international trade and investment and
aided by information technology.
Globalization in short, points to the whole effort towards making the world global community as
a village.
The International Monetary Fund (IMF) has defined globalisation as: ‘the growing
interdependence world-wide through the increasing volume and variety of cross-border
transactions in goods and services and of international capital flows, and also through the more
rapid and widespread diffusion of technology’ (Turner, 2006).

Globalisation is the process by which the world is becoming increasingly interconnected as a

result of massively increased trade and cultural exchange.

This process has effects on the environment, on culture, on political systems, on economic
development and prosperity, and on human physical well-being in societies around the world.
Globalisation has increased the production of goods and services.

Features of globalisation

1. Liberalisation:
It stands for the freedom of the entrepreneurs to establish any industry or trade or business
venture, within their own countries or abroad, ie freedom of investment.
2. Free trade:
It stands for free flow of trade relations among all the nations. It keeps business and trade away
from excessive and hard regulatory and protective regimes.
3. Liberalisation of Economic Activity:
Economic activities are be governed both by the domestic market and also the world market. It
stands for the process of integrating the domestic economies with world economy.
4. Liberalisation of Import-Export System:
It stands for liberating the import-export activity and securing a free flow of goods and services
across borders.
5. Privatisation:
Keeping the state away from ownership of means of production and distribution and letting the
free flow of industrial, trade and economic activity across borders.
6. Increased Collaborations:
 Encouraging the process of collaborations among the entrepreneurs with a view to secure rapid
modernisation, development and technological advancement.

7. Economic Reforms:

Encouraging fiscal and financial reforms with a view to give strength to free world trade, free
enterprise, and market forces.

8. Globalisation has several dimensions:

Increased and Active Social, Economic and Cultural Linkages among the people. Globalisation
has social, economic, political cultural and technological dimensions. It involves all round inter-
linkages among all the people of the world.

Free flow of knowledge, technology goods services and people across all societies is it key
feature. It attempts at making geographical borders soft permitting all the people to develop their
relations and links.

Globalisation accepts and advocates the value of free world, free trade, freedom of access to
world markets and a free flow of investments across borders. It stands for integration and
democratisation of the world’s culture, economy and infrastructure through global investments.

Challenges
1. Designing compliant policies to maximise the potential benefits from globalisation and to
minimise the downside risks of destabilisation and marginalisation.
2. Macro-economic instability that creates the sense of economic insecurity and uncertainty
3. Underdeveloped financial sector
4. Resource mismanagement and misallocation, occasioned by widespread corruption or wasteful
or unproductive use of public funds.
5. Globalisation reinforces interdependence among countries and regions
6. It deepens the partnership among the advanced countries and economies against their poorer
counterparts (developing countries).
7. Insufficient funding and reliance on concessional lending facility of World bank which may
come with unfavourable terms.
Opportunities globalisation presents in the Nigerian economy
1. It creates opportunities for socio-economic development among states or nations
2. It paves way for international trade and investment thereby establishing and sustaining trade and
bilateral relations among countries.
3. Technological diffusion and the spread of economic development from rich nations to low
income countries.
4. Globalisation creates freedom to choose markets among globalised economies
5. Nigeria can enjoy the benefits of scientific advances and industrial progress available in
developed countries for the improvement and growth of their areas