A CAUSAL ANALYSIS BETWEEN PRIVATE CONSUMPTION AND PRIVATE INVESTMENT IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Successful economies are built on a strong macroeconomic framework of policies and systems, which are essential to foster sustainable development, while maintaining price and external sector stability and improving the general welfare of the people. In Nigeria, it is the executive arm of the government, especially the federal ministry of finance, the national planning commission, the Central Bank of Nigeria and the presidency that have been responsible for the formulation and implementation of the nation’s macro-economic policies.

Consumption and investment are two important macro-economic variables in economic analysis. There estimation is relevant to economic planning and development. More often, the consumption patterns of individuals in an economy are dependent on their income. There have been growing debates on the relationship between private consumption and private investment in the country.

Numerous theories have been propounded about private consumption and private investment. Emphasis is been placed on the simple Keynesian consumption function. This is because it establishes a time linear relationship between private consumption and income.

Private investment is influenced by profit expectations and is said to be profit elastic. It depends upon two factors:

  1. The rate of interest, and
  2. The marginal efficiency of capitals.

It is encouraged when the marginal efficiency of capital is high and or the rate of interest is low. Private investment is therefore an induced investment.

Private investment as refers to in this study is the investment made by the private sector propelled by the animal spirits in the investors. It can be divided into two categories:

  1. Private domestic investment and
  2. Private foreign investment.

These categories of expenditures add to GDP. Investment especially private investment is the unstable component of aggregate expenditure, it is said to be unstable because it changes easily. Investment project will be pursued only if its expected profitability exceeds the cost of borrowing to finance the project by an amount sufficient enough to justify the risk of the project.

Also, the major determinant of a country’s level of consumption and savings is the country’s National Income. The higher the level of income, the higher the consumption and savings will be. Even at the individuals level, a person’s income is directly determined, to a large extent, by his consumption and investment pattern in Nigeria.

Income, consumption and investment are related. This relationship is based on the fact that all expenditure in the economy can be regarded as either consumption expenditure or investment expenditure. The above relationship between savings and investment stems from the fact that all investment emanates from savings, which have been made in one way, or the other by individuals firms or governments therefore, whatever that is saved is assumed to be invested. Even when money is borrowed from the bank or any other financial institution, this is money saved by someone or an institution.

Summarily, an increase in current consumption demand will lead to a decrease in the amount of financial resources that could be saved. Since, we assume that savings is equal to investment, therefore, investment will decrease. This is directly from the fact that as less money is lift in the hand of individuals for savings; fewer amounts would be made available for in investment as consumption increases.

The two variables (private consumption and private investment) relate inversely. Also, less money is left for savings after much consumption expenditure is made, financial institutions who keep the savings, will be constrained in rationing such saved funds, to meet the demand for private investors. This will result to a general increase in the interest rate for borrowing such money will increase

It should be noted that we couldn’t analyse the causality between private consumption and private investment without talking about “interest rate”. Moreover, since theoretically, interest rate tends to relate negatively with investment for and economy that is highly sensitive to interest rate will reduce the level private investment funds. This goes a long way to further buttress the fact that investment relates negatively with rate of interest and consumption level in the economy.

1.2 STATEMENT OF THE PROBLEM

A causal analysis between private investment and private consumption is necessary in an economy. This is because the growth of an economy is obtained from the relationship that exists between the two macro-economic variables. It has earlier been pointed out that private consumption and private investment are two macro-economic variables whose performances affect the aggregate economy.

The growth of an economy depends on the degree of and the relationship between consumption and investment.

Since the private sector plays prominent role in economic development, private consumption and private investment are considered.

There have been argument as to the existence of relationship between private consumption and private investment, the nature and direction of the relationship and whether they are independent of each other.

Above all, what will be the effect of and increase in consumption on investment and vice versa? Will a rise and fall in either of them affect the economy and how?

These and many more questions poses problem with respect to private consumption and private investment. Hence, the need to investigate on this economic issues. Thus, it is imperative to analyse the difference and relationship between the two macro-economic variables knowing fully, that the desire of any economy is to attain to the level of ensuring rapid economic growth.

I.3 OBJECTIVE OF THE STUDY

Private consumption and private investment are two macro-economic variables that determine economic growth.

This study dwells on private consumption and private investment. Accordingly, the objectives are enumerated as follows:

  1. To find out if private consumption affect private investment in Nigeria.
  2. To find out if private investment depends on private consumption.
  3. To analyse the degree and nature of the relationship between private consumption and private investment.
  4. To verify if private consumption and private investment are independent of each other.
  5. To know the effect of a decrease in private consumption on private investment and vice versa.
  6. To analyse the factors that influence private investment in Nigeria under the period of study and proffer suggestions as how the can be managed to boast private investment
  7. To analyse if, there exist any relationship between private consumption and private investment, and the extents to which private investment depends on private consumption in Nigeria.
  8. To make recommendations based on the findings.

 1.4 HYPOTHESIS OF THE STUDY

A hypothesis is an assumption that we make about a population parameter. It is generally a statement about the probability distribution of the population. Hypothesis testing always involves making a decision concerning the true value of a parameter on the basis of the corresponding statistics obtained from random sample observation.

The hypothesis of this study has been derived from the objectives of the study. The following hypothesis will be carried out in respect of this study:

H0: There is no causal relationship between private investment and private consumption

H1: There is a causal relationship between private investment and private consumption.

1.5 SIGNIFICANT OF THE STUDY

The growth of any economy could be obtained from the relationship that exist between private consumption and private investment more often these two variables are been used to know how the standard of living of any country are. The causal analysis between private investment and private consumption will go a long way to provide a guideline to the relationship between private investment and private consumption and how the could be best managed so as to bring about tangible or significant level of productive capacity which would be of use or profitable to the central bank of Nigeria.

Also, the study is significant because:

  1. It will help governments in deciding on the pattern of investment and consumption to allow the econo0my.
  2. It will help policy makers in formulating more and well-articulated policies on private consumption and private investment.
  3. It will equally help further researchers to carry out easy research.
  4. It will also guide consumers and investors on the decisions.

Through the findings and suggestion of this research project work, a greater awareness will be generated in the academic community so as to appreciate the efforts being carried out by the federal government of Nigeria through the central bank of Nigeria to improving the policies affecting private investment in relevant years.

Finally, this study will assist in a modest way to increasing student knowledge on the practical and real life situation of the theories the learn in the classroom.

1.6 SCOPE AND THE LIMITATION OF THE STUDY

The scope of the study is the relationships that exist between private consumption and private investment in Nigeria within a time range of twenty years, which is from 1984 to 2003.

The limitations of the research are:

Inadequate fund: there is the problem of inadequate fund, which impeded the researcher from reaching out to all the necessary agencies and places.

Time: the project was done the same time when serious academic work was going on in school; hence he had to manage the time.

DATA SOURCES: The sources of data is secondary; this source is inherent with flaws. Therefore, these flaws could be present in the study.

All the above, notwithstanding all errors are the researchers.

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