Exchange Rate Variation and Inflation in Nigeria

ECON 2301 Principles of Macroeconomics Time: Th 7:05 pm – 9:45 pm Synonym: 40512 Section: 023 Room: NRG2 2120

Inflation is one of the most talked about words in society that causes a big problem in economics today. Inflation is an increase in the overall prices of goods and services and a decline in the purchasing value of money. This exists when the money supply surpasses the goods and services that are available. For this commentary, I chose to pick the article In a Venezuela Ravaged by Inflation, ‘a Race for Survival’ that deals with the topic inflation.

Inflation is when there in an increase in price of goods and service, causing there to be a fall in the currency as lesser goods and services can be brought by each unit of currency due to the rise in price. Rapid economic growth will often lead to inflation. When the economy is rapidly growing, a company will need to employ more employees, resulting to a fall in unemployment rate. As unemployment rate falls, lesser people will be looking for jobs and the company will find it harder to fill up job vacancies. This will cause the salaries of the workers as well as company spending to increase, resulting in the company passing on the extra costs to the consumer. Together with the raise in salaries for the employees, they will have more to spend, resulting in an increase in an aggregate demand. All this will result in rapid economic growth, where the increase in price will cause inflation to occur.

This task request will be focussed on providing input for the development of Inflation Working Paper (WP) currently in draft phase. The recent version of the WP is attached for your reference purpose only.

THE UNIVERSITY OF NEW SOUTH WALES SCHOOL OF ECONOMICS SESSION 1, 2008 ECONllOl MICROECONOMICS I FINAL EXAMINATION TIME ALLOWED - 2HOURS

In economics, with the inflation is a rise in the actual general level of prices of goods and services in an economy from over a period of time. When the general price level rise, such as each of the units currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power4 per unit of money. This therefore means that with the loss of real value in the medium of exchange and unit of account within the given and actual economy. With a chief measure for example and the price of inflation is within the given inflation rate, the annualised percentage change within a general price index over time in which is normally the consumer price index.

This study is designed to examine the causes of exchange rate fluctuations and their impact on the Nigerian economy since there is scarcely any country that lives in absolute autarky in this globalised world. The economies of all the countries of the world are linked directly or indirectly through asset or/and goods markets. This linkage is made possible through trade and facilitated by foreign exchange. The price of foreign currencies in terms of a local currency (i.e. foreign exchange) is therefore important to the understanding of the growth trajectory of all countries of the world.

A lot of literatures have already studied about the inflation and inflation prediction and in this paper literature review will be discussed from the theoretical aspect and empirical aspect. The researches of the inflation, which are studied, by a lot of scholars in the field of economics have been conducted for a long time especially during the 1970s and it is the heyday when people would like to pay more attention to research the inflation. The inflation has become a hot topic among the economic life and social life since 1987. However, no matter whether it is in the western economic field or in the Chinese economic field, people have different definitions on the inflation and so far there is no unified opinion and conclusion can be accepted generally by everyone. For example, Wyplosz and Burda (1997), Blanchard (2000), and Barro (1997) define that inflation is a sustained rising in the overall price level of products and services in an economy throughout the time period. By contrast, Zha and Zhong (2016) define that inflation is considerable as the mechanism to improve economic growth. In general, the common definition of the inflation is that the inflation is a continuous rising process in the aspect of price. In other words, the value of the currency decreases continually.

M. E. Drew and J. D. Stanford School of Economics and Finance, Queensland University of Technology; and School of Economics, The University of Queensland, respectively

Yuansheng LI - (IJAEBM) INTERNATIONAL JOURNAL OF ADVANCED ECONOMICS AND BUSINESS MANAGEMENT Vol No. 1, Issue No. 2, 093 - 097

Department of Finance, University of Nebraska-Lincoln, Lincoln, NE 68588-0490, USA b Department of Economics, Wichita State University, USA Received 1 November 2003; accepted 1 December 2003 Available online 20 April 2004

The growth rate of Nigeria remained low in the late 90’s through the early 2000’s. In 2003, it climbed to over Ten percent and in 2004 soared to almost Thirty-Four percent. Since that time, it has relatively stabilized and currently stands at 4.18% with an annual growth rate of 6.54%. One of the fastest growing segments is Information and Communication, which account for about 10 percent of the total output. The country’s inflation rate has declined recently after a period of increases and currently stands at 8.3 % (TRADING ECONOMICS, 2014).

Inflation in the country is a combined result of printing money which results to an increase in the money supply, but there being no goods and output to back it up with. In other words, these monetary decisions made by the government combined with a shortage in supply of goods have had a major impact on the people of Zimbabwe’s living conditions. The shortage has been caused by the implementation of price controls. The price controls provide less incentive for suppliers to supply the goods because cost of producing the goods are higher than the price set by the government, making the shortage worse and prolonging the inflation since the market prices are becoming higher and higher (“Hyper”, 2007). The inflation is at such high levels, that when someone gets money, the first thing they do is spend it on anything they can since they know the value of money will decrease rapidly (Gerson, 2008). The money an individual gets today will be roughly worth 5% less the next day. The fact that the country’s highest valued bill cannot buy a loaf of bread says a lot

Likewise, the present study utilizes the annual data of remittance and population growth to find the impact of remittance on inflation of Nepal. While analyzing the impact of remittance on inflation, the annual data of remittance and inflation as well as population growth have been employed. The political instability is taken as dummy variable while analyzing the relationship between annual inflation and remittance. The data for remittance are taken from Economic Survey of Nepal and data associated with population are taken from International Monetary Fund (IMF).

The percentage of inflation in regard to price movements and the purchasing power of the rupee need to be evaluated on the basis of wholesale price index (WPI) with 1950-51 as the base year. Unfortunately, the government with the intention of preventing a factual comparison of the purchasing power of rupee, keeps changing the