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PROJECT TOPIC- RELATIONSHIP BETWEEN BALANCE OF PAYMENTS DISEQUILIBRIUM AND SOME MACROECONOMIC INDICATORS

PROJECT TOPIC- RELATIONSHIP BETWEEN BALANCE OF PAYMENTS DISEQUILIBRIUM AND SOME MACROECONOMIC INDICATORS

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

From the earliest times, trade have involved discrepancies in values exchanged; settled in credit or money and these discrepancies constituted the origin of balance of payments. The term itself entered the English Economic Literature during the Mercantilist period, eventually replacing over surplus with overvalue. In its original usage, balance of payments” is meant by an excess of payments over receipts and under the gold standard this excess meant a gold outflow.

In spite of the fact that international trade has many benefits as mentioned above, it will therefore be inadequate if we refuse to acknowledge its disadvantages. One of the major disadvantages of international trade is balance of payments. “Many problems of international trade focuses not on the balance of trade between nations but on the balance of payments” (Mckenna 1972:189).

This is due to the fact that balance of trade is too narrow to cover all the economic activities arising between a nation and other nations of the world. Therefore, a country focuses its attention on the balance of payment position. Every nation has an international balance of payments (Bowden 1986:662). Developed, developing and underdeveloped countries at times experience balance of payment problem.

But the difference between the developed and developing countries as regards their balance of payment position is that due to deterioration in their terms of trade, the developing nations suffer the impact of balance of payments deficit more than the developed nations. Due to the facts that most of the less developed economics of the world have been experiencing the problem of financing their purchases from the developed economics, many nations would remove its trade barriers, especially tarilt, then these less developed nations could increase their sales of goods and services to the developed world and could then finance their purchases from abroad without having to accept gifts or loans from the more developed economics.

In order to benefit from the advantages of international trade different nations engage in international trade. “Each country keeps her own accounts of its international dealings. These account are called the balance of payments accounts” (chikeleze 1989:1) The balance of payments accounts are divided into two broad accounts current Account and capital Accounts. Current Account is that part of balance of payments accounts which summarizes transactions in currently produced goods and services including merchandise, services, investment in come etc.

on the other hand, capital account is that part of balance of payments account which summarizes transactions in financial assets, including stocks, bonds; short term credit and indirect purchases foreign plants or businesses. Therefore, capital account covers investments and short – term monetary flows.

These accounts among other things help each nation to know the sources of its new foreign money and about all ways the foreign money balances are beings used up. Each nation’s international balance of payments shows therefore, that nation’s trading and financial position with the rest of the world. The structure of a country’s balance of payments reflects both its stage of economic development and the pattern of each activity within the country. Different types of structure maybe identified.

  1. The Developing Country: The balance of trade consists of one or two, usually low-value products the earnings of which are frequently inadequate to finance the importation of essential industrial and capital goods. Many of the countries in African and Asia fall into this category.
  2. The Newly Industrializing countries (NICS): These countries have a number of recently established industries which enjoy a competitive edge due to low wage costs. The success of their export industries result in a surplus on the balance of trade which is used to finance a deficit of invisible and to finance capital borrowings for further industrial development. The Niles includes Taiwan, Singapore and South Korea.
  3. The Development Creditor Country: Eventually a developed country may find that continued growth of expert earnings results in a very large surplus on the balance of trade. In addition, the growth of its services industries reduces any deficit on invisible so that current account as a whole is in a surplus. This can be said to be used to finance a deficit on capital account as the country beings to build up its portfolio and direct investment over seas Japan is presently the most successful country of this type.
  4. The Mature Credit Country: Over a long period of time the developed creditor country will build up substantial overseas capital interests. It will yield rent, interest and dividend payment. Surplus on invisible will be sufficient to counter deterioration in the balance of trade as the country’s exports are faced with growing competition from the Nils.
  5. The Ageing Debtor Country: Eventually a mature creditor country balance of trade may worsen to the finance the deficit. A persistent deficit on the current account will require corrective measure from the government since no reliance can be placed on future spontaneous improvements. Great Britain and United States are two countries which have reached this phase and consequently governments have found that the balance of payments acts as a constraint on their ability to pursue other objectives. It should be noted that progression from one phase to another is by no means inevitable. The balance sheet of international account or “accounting balance of payment is a statement recording transaction between residents (or citizen) of the given country and the rest of the world. Transactions are either debit items, which arise from purchases, or credit items, which arise from sales, sales of goods, of claims, and of gold and foreign exchange are credit items, and purchase of goods, claims and of gold and foreign exchange are debit items. All transactions (sales or purchases) have a deal character. When a good is sold for money, the ownership of the good and money changes hands. The ratio between the price of the good follows that the value of goods payment equal the value of money payment so that the sum of debit items arising from purchase is equally to the sum of credit items arising from sales. The identity between debits and credits is preserved even when transactions include gifts, reparations payments, and other unrequited transfers. In the balance of payments accounts an unrequited transfer is financed (a sale of goods, of claims, or of gold or foreign exchange itself) is recorded as a credit. Thus the accounting balance of payments is tautology, and has therefore, no economic (market) significance. Its significance lies rather in its role as the basis on which a accounts are organized and as the starting point from which balance of payment analysis proceeds.

The accounting balance of payments records both regular transactions and transactions made to settle any gap between regular purchase and sales (us congress 1965). The problem in constructing a useful operational definition of the balance of payments is thus the problem of separating “regular” transactions from “setting” transactions, a distinction best suited to the purpose of the balance of payments analysis.

From the foregoing, we have seen the origin of balance of payments, the need for nations to keep accounts of their international economic dealings and also how these nations should keep the accounts in terms of items to include as credit or debit items.

PROJECT TOPIC- RELATIONSHIP BETWEEN BALANCE OF PAYMENTS DISEQUILIBRIUM AND SOME MACROECONOMIC INDICATORS

1.2 STATEMENT OF PROBLEM

Balance of payment dis-equilibrium has been facing most African and Asian countries all the less developed countries (LDCs) in an adversely. The different governments of these less developed countries have been finding it very difficult to manage this balance of payment disequilibra.

In Nigeria, balance of payments problem has been of great concern to the government and citizenry especially economists and managers of public finance.

Industrialization and technological advancement of the country has remained very low. And despite that fact that more than 60 percent of the country’s population are engaged in agriculture, the country have never the less been importing food to supplement ones produced in the economy.

Unemployment rate in Nigerian economy has remained very high. Many graduates and school levers are unemployed, even those who are employed are not well remunerated. Low rate of employment leads to low level of output and hence high cost of living.

The central issues therefore are:

  1. What roles have our administrators to play as regards the imbalance in Nigeria’s balance of payments? In other words, has politics any hand in the balance of payments disequilibrium facing the economy?
  2. What impact has the nature of our export goods on the balance of payments problem?
  3. What influence has the activities of smugglers on the balance of payments disequilibrium?
  4. Has the low level of industrialization and technological advancement any effect on the Nigeria balance of payments problem?
  5. Has balance of payments disequilibrium any influence on the nations per capital income, employment level and even standard of living?

1.3 OBJECTIVES OF THE STUDY

The objects set to achieve in this study is to find out the effect of balance of payment disequilibrium on a macroeconomics level of the economy such as gross domestic product and inflation.

The study is also aimed at finding ways of improving the performance of the above mentioned macroeconomic indicators. The study is also aimed at ascertaining the remote causes of balance of payment deficit in Nigeria.

1.4 STATEMENT OF HYPOTHESIS

The study therefore hypothesis as follows

Ho: The level of gross domestic product (output) has no significant impact on the balance of payments.

Hi: The level of GDP (output) has a significant impact on the balance of payment

Ho: There is no relationship between inflation and balance of payments.

Hi: There is an inverse relationship between inflation and the balance of payments.

1.5 SIGNIFICANT OF THE STUDY

The study of balance of payment disequilibrium was to understand the meaning, causes and effect of this balance of payment disequilibrium and to find the solution to it. It is also useful in evaluating the degree of Nigeria’s international solvency. This study also reveals the influence of National in come of foreign transaction. It is very important in the appraisal of Nigeria short-term international economic prospects.

To the entire public, it will help to identify the factors contributing to the disequilibrium of balance of payment and know how to avoid it.

1.6 SCOPE/LIMITATIONS OF THE STUDY

This research work on “Balance of payments disequilibrium and the macroeconomic performance in Nigeria” is going to cover some of the Nigeria international economic transactions from the year 1985 to 2003. The researcher will attempt to find out how the imbalance in current balance of payments in Nigeria has effected such macroeconomic variable as; inflation and level of output with in the period under study.

A more appreciable work would have been done by the reader but for the fact that time limit is short as the researcher is a student with limited resources availability and also the work is combined with studies. Besides, financial constraints was another limiting factors encountered in the course of this research

Furthermore, souring materials furthers study was another problem encountered by the researcher. But nevertheless despite these problems encountered, the researcher finally produced this work in addition to the existing write ups on this topic.

1.7 PREVIEW

For a systematic and scientific approach, this researcher work is divided into five chapters, which are further subdivided into sections. The introductory section present the general background, statement of the problem, objectives of the study, scope/limitation of the study preview and definition of terms are shown in chapter one. In section two, the relevant literature is reviewed. The methodology of the research is presented in section three. Section four concentrates on the presentation and analysis of regression results. The final section which is section five concludes the research.

1.8 DEFINITION OF TERMS

INTERNATIONAL TRADE: This is a trade between one nation and another. In other words, the trade between one country say Nigeria and the rest of the world is known as international trade.

BALANCE OF TRADE: This is the total goods and services exports minus good and services imports. Balance of trade is the largest parts of international balance of payment, but excludes capital items.

EXPORTS: Goods and services sold to foreign buyers are called exports.

Imports: Purchase from foreigners. That is the goods and services bought from abroad

BALANCE OF PAYMENTS DEFICIT: When the values of import items exceeds the value of export items there will be a deficit in a country’s balance of payments.

BALANCE OF PAYMENT SURPLUS: This is the reverse of a deficit. Surplus in the balance of payments occur when the value of a country’s export items exceeds import items.

THE CURRENT ACCOUNT: This is the part of balance of payment account that records all transactions goods and services that is it portrays the flow of goods and services in the form of exports and imports for a country during a given year.

THE CAPTAL ACCOUNT: The part of the balance of payment account which summarizes transactions in financial assets, including stock, bonds, short – term credit, and direct purchase of foreign plants or business.

BALANCE SHEET: A statement showing a firms financial position what it owns (assets) what it owes (liabilities) and what left over (net worth)

BALANCE OF PAYMENTS DISEQUILIBRIUM: When there is no state of balance in the balance of payment, there will be balance of payment disequilibrium. In other words, balance of payments disequilibrium simply means imbalance in the balance of payments account. This imbalance maybe surplus or deficit.

BALANCE OF PAYMENT: This is a statistical record which summarizes all transactions which take place between the residents of a country and the rest of the world during a given period of time usually a year.

PROJECT TOPIC- RELATIONSHIP BETWEEN BALANCE OF PAYMENTS DISEQUILIBRIUM AND SOME MACROECONOMIC INDICATORS

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