Ss2
Economics third term scheme of work
1. Elementary treatment of fiscal policy- meaning of public finance and fiscal
policy, objectives of public finance, sources of government revenue ,
revenue allocation,
2. Elementary treatment of fiscal policy -direct and indirect taxation, effect of
incidence of taxation, structure and effects of public expenditure on
government budget.
3. Government budget- meaning of government budget, reasons for budget,
types of budget-balanced and unbalanced budget
4. Balanced and unbalanced budget- ways of financing deficit budget
5. Element of national income accounting – meaning of national income, uses
of national income definition of national income concepts
BUDGET
6. Element of national income accounting –uses and limitations of national income figures,
trend and structure of national income.
7. Types of financial institution and their functions-money market institutions, capital
market institutions, and other market agencies.
8. Types of financial institutions and their functions-functions of capital market
institutions, how the stock exchange operates. Secondary and primary markets
9. Money: demand for money and supply of money- determinant of supply and demand
for money, value of money and price level.
10. Money: inflation and deflation –meaning and types of inflation, causes and effect of
inflation/deflation.
11. Money: control of inflation/deflation. Inflation in Nigeria.
PUBLIC FINANCE
Public finance can be defined as the branch of economics which deals with the financial
activities of government concerning revenue, expenditure and debt operations and their effect
on the economy.
A budget may be defined as a financial statement of the total estimated revenue and the
proposed expenditure of a government within a given period of time usually one year.
TYPES OF BUDGET
i.
ii.
iii.
Balanced budget: This is the type of budget whereby the total estimated revenue is
equal to the total proposed expenditure for a year.
Surplus budget: This is the type of budget whereby the total estimated revenue is
greater than the total proposed expenditure for a year.
Deficit budget: This is the type of budget whereby the total estimated revenue is less
than the total proposed expenditure for a year. The question that arises is where
does the government get the money it uses to finance deficit budget? Through
borrowing from the central bank and commercial banks, the public printing of more
currency, aids and grants e.tc.
Importance or uses of budget
i.
ii.
iii.
iv.
To allocate resources from one sector of the economy to the other.
It is used by the citizens and international community to appraise the performance
of the government.
It is used as a tool to curb inflation and deflation.
The government can also use it to foster economic growth.
Uses of budget surplus
i.
ii.
It is used to reduce aggregate spending (demand) thereby reducing inflationary
pleasure in the economy.
It is used to revitalize the economy if the government has to borrow money from
external sources eg the International Monetary Fund.
Uses of budget surplus
i.
ii.
iii.
It is used to increase aggregate expenditure (or demand and reduce unemployment)
It is used to finance projects which involve huge capital outlay.
It can also be used to finance national emergency such as war.
NATIONAL OR PUBLIC DEBT
Public debt refers to the debt owned by the government of a country both internally and
externally.
TYPES OF NATIONAL DEBT
i.
ii.
Internal debt: The debt which a country owes its citizens (domestic debt)
External debt: The debt which a country owes foreign government and organization
(foreign debt)
INSTRUMENT OR SOURCES OF GOVERNMENT BORROWING
i.
ii.
iii.
iv.
v.
Treasury certificates: These are securities for medium term borrowing (a period of
one to two years) and they carry high rate of interest than Treasury bill.
Treasury bills: These are securities used for short term borrowing for about 90 days.
These carry low interest rate.
National saving scheme: Government can also borrow money from National Saving
scheme.
Development stock: These are referred to as government stock and they are used
for long term borrowing ( five years and above)
Negotiations: The government can borrow from external financial institutions like
Paris club, international Monetary Fund, World Bank e.tc.
REASONS FOR GOVERNMENT BORROWING
i.
ii.
iii.
iv.
v.
vi.
vii.
To finance budget deficit: Government borrow money in order to finance deficit
budget.
To finance huge capital project: Huge capital project is also financed through
government borrowing.
To meet cost of emergencies: Government can embark on borrowing to enable it
meet the cost of national emergency eg war, famine, and drought and hurricane
e.tc.
To reduce economic burden on tax payers: Government can decide to reduce the
economic burden on tax payer by borrowing money to execute proposed projects.
To service loan: Government can borrow in order to service another loan earlier
taken
To provide employment opportunities.
To meet balance of payment disequilibrium
SOME TERMS ASSOCIATED WITH DEBT
Debt servicing: Debt servicing refers to the payment of interest on loans taken by
government and the repayments of capital at the future date.
Debt management: Debt management refers to a process or situation whereby the
government structure‘s debt, which are dominated in foreign currency with the
fundamental aim of reducing the total external debt stock.
REVENUE ALLOCATION IN NIGERIA
Revenue allocation refers sharing of the nation’s wealth between the component parts of
the nation that is between federal, state and local government.
Revenue allocation is grouped into two major parts. These are:
i.
ii.
Vertical revenue allocation: This involves the sharing of the revenue accruing to the
federal account among the three tiers of government – federal, state and local
governments.
Horizontal revenue allocation: This refers to the sharing of revenue accruing to the
federation accounts among the units within a given level of government. It involves
certain principles based on some factors to be applied in revenue allocation. These
principles include population size, land mass, derivation, ecological problems e.t.c. it
also involves the formular which refers to the system of relative weight assigned to
various principles eg, federal government -40%, state-20%, local government-15%,
mineral producing areas-10%, ecological problems-5%, special fund-5%, others -7%.
These are just tentative figures.
TERMS ASSOCIATED WITH DEBT MANAGEMENT
Debt conversion programme : Debt conversion was introduced in 1988 in Nigeria the aim
was to swap outstanding commercial debt by interested foreign creditors for investment in
priority sectors of the economy like Agriculture, manufacturing and allied sector.
Debt rescheduling: This involves a rearrangement of the repayment terms of original loan.
Rescheduling usually covers shift in repayments of principal and interest. The rescheduling
exercise usually postpones the debt repayment period and spread it over a number of years
with an initial number of graces.
NATIONAL INCOME ACCOUNTING
National income is the monetary value of all the goods and services produced in a country
within a given country within a given period of time usually one year.
Method of measuring national income
i.
ii.
iii.
Output method: This approach is also known as value added method, it measures
the total value of all goods and services produced in a country by individual, firms
and government in a year. To avoid double counting only final product or value
added should be considered. Value added is defined as the value of output less cost
of input.
Income method: The income method deals with summation of the earnings of all the
factors of production used to produce national output in a national output in a
particular period. The incomes to be added include salaries and wages, profit rent
and interest. Transfer income or gift to beggars and aged people should be excluded.
Expenditure method: This measures the total expenditure on consumption and
investment made by individuals, firms and government during a year. In order to
avoid double counting expenses on goods and services used in production are
excluded. In other words, it measures the total expenditure on currently produced
final goods and services plus net export. Transfer payments such as pensions paid to
retired workers, gift to beggars are excluded.
CONCEPTS IN NATIONAL INCOME
a. Gross National Income (GNI): Is the money value of all final goods and services.
Produced in an economy in a given period plus net factor (net income) from abroad.
b. Gross Domestic Product (GDP): This is the total market value of final goods and services
produced in a country at a particular period of time. In calculating the GDP of a country,
no account is taken of the nationality of those that produce the goods and services GDP
is used in determining whether the country concerned is experiencing economic growth,
decline or stagnation. GDP=C+I+G
c. Gross National Product (GNP): GNP is defined as the total market value of final goods
and services produced in a country over a given period of time including net income
from abroad. GNP measures the value of final goods and services that the country’s
citizen produces regardless of their location. GNP=C+I+G+(X-M).
d. Net National Product (NNP): It is defined as the Gross National Income after all
necessary adjustment on capital consumption (depreciation) has been deducted. The
Net National Product is the same as GNP minus capital consumption. NNP=C+I+G+(x-M)depreciation.
e. Net Domestic Product (NDP): GDP-Depreciation.
f. Depreciation of Capital is the tear and wear of capital goods used in the production
process. It is also known as capital consumption.
g. Personal income is the amount earned by an individual for taking part in the production
of goods and services either by him or his property eg wages, interest, rent and profit.
h. Disposable income: is what individual have to spend after personal income tax has been
deducted from their person income ie disposable income equals personal income less
personal income tax.
i. Nominal income is the value of all goods and services produced expressed in terms of
current money income received from production.
j. Real income is nominal income expressed in terms of what it can buy. It is the nominal
income deflated by the price level.
k. Standard of living: it indicates the volume of available goods and services at the
disposals of individuals and therefore shows the level of welfare. It is measured by per
capita income. There is an inverse relationship between the standard of living and cost
of living.
l. Cost of living: is the general price level of goods and services that determine how much
an average household needs to meet the basic necessities of life. It is measured in terms
of price index. If the price level increases the cost of living increases and the standard of
living falls.
m. Per capita income PCI: is the national income of a country divided by her population. It
gives the average income of a country and it serves as an economic indicator of
standard of living and development. PCI=
FORMULAR FOR CALCULATNG NATIONAL INCOME USING EXPENDITURE APPROACH.
National Income =C+I+G+X-M+ Subsidy-Taxes-Depreciation
Where
C=Consumption expenditure
I=investment of private expenditure
G=Government expenditure on consumption and investment
X=Exports
M=Imports
Example
The following is the trading account for country Z in the year 1973 (in millions)
a. Citizens’ private expenditure
b. Government expenditure on goods and services
c. Various stock at home
₦ 35.0m
₦ 15.6m
₦ 11.8m
d.
e.
f.
g.
h.
Export income from abroad
Import income paid abroad
Taxes on expenditure
Capital consumption
General subsidies
₦13.5m
₦10.4m
7.0m
5.8m
1.3m
From the information above, calculation the national income for Nigeria for the year 1973
Solution
N.I= C+I+G+X-M+ Subsidy-Taxes-Depreciation
N.I=₦35m+₦11.8m+₦15.6m+ (₦13.5m-₦10.4) +₦1.3-₦7.0m-₦5.8m=₦54.0m
USES OF NATIONAL INCOME
a. National income allows for international comparison: National income figures are used
to compare the economic performance between two different nations.
b. National income influences foreign investment: It attracts foreign investments to a
country, based on the level of its national income, as investors usually seek countries
with rich or fast growing market.
c. National income is used to measure standard of living: National income figures are used
to measure the welfare through the use of per capita income.
d. National income figure is used for economic planning: The national income figure is
used by the government to embark on either long term planning or short term planning.
e. It is used as a basis for aids and grant
f. It is used for performance ie whether the economy is growing or not
g. It is used for international comparison of standard of living.
h. It is used as a basis for contribution to international organization.
i. It allows for sectoral comparison.
DIFFICULTIES IN MEASURING NATIONAL INCOME
i.
Non-marketable items: A lots of goods and services are non-marketable eg owner
occupier of house, the service of house wife and maids.
iii.
Lack of data: The data we have are always unreliable and most people do not keep
records.
iv.
Dividends: Usually money earned by firms is paid as dividend to shareholders but
some are retained.
v.
Unstable value of money: The value of money is always unstable; the value of
money this year is always different with that of last year due to change in price.
vi.
vii.
viii.
Depreciation: The depreciative value of capital is always difficult to calculate.
Income from unlawful business activities: Some of these unlawful business activities
are not recorded in the Gross National Product (GNP) estimate.
Double counting: It is difficult to separate intermediate product from final product
for the purpose of estimating correct value of national income.
CIRCULAR FLOW OF INCOME
Circular flow of income is the transaction in goods and service and the payment made for
such transaction between firms, individuals and government. It also shows how individual
expenditure becomes the income of another.
DETERMINANT OF NATIONAL INCOME
j.
Capital availability: The availability of physical, financial and human can greatly
determine then GNP performance. The economy that has them at her disposal and
utilizes them judiciously will be better than those that do not have or refuse to utilize
them expectantly.
iii.
Political stability: Countries with relative political stability are known to have greater
output than those with political instability. This instability does not allow for
productivity but rather gives room for destruction.
iv.
Natural resources: countries that are blessed with natural resources have greater
potential of being rated higher than those countries with less or without in terms of
international rating.
CONCEPT OF SAVINGS CONSUMPTION AND INVESTMENT
Savings: Savings is that part of income that is not consumed. It is good for individual to save
to enable him invest. Savings depends on so many factors such as level of income, financial
institutions, personal attitude to save, interest rate, government policies etc.
Consumption: Consumption is that part of income that is spent on durable goods, non
durable goods and services. Examples of durable goods include car, aeroplane, while nondurable goods include food and clothing. Services are intangible and include transport,
shipping, insurance etc. This means that consumption is an important component of
national income. Factors that determine consumption level include income, taxation, credit
facility, population, age distribution, etc.
Investment: Investment is the addition to capital stock. Examples are expenditure on roads,
factories, houses and machines.
Relationship between savings investment and consumption
Savings, investment and consumption are closely related. With the following formulae:
Y=C+S……………………………………1
Y=C+I…………………………………….2
Equating equation 1and 2
S=I
Where
Y=Income
C= consumption expenditure
S=Savings
I=Investment
Propensities to consume and save
a. Average propensities to consume (APC): Is given the ratio of consumption to
income.
APC=
b. Average propensity to save (APS): It is the ratio of saving to income. APC=
We can show that APC+APS=1 as follow C+S=Y,
Divide through by Y
+
APC+APS=1
This shows that APC is positive but less than 1 and APS is also positive but less than 1.
Example: Given that at income level of ₦20,000 consumption is ₦12,000 and savings is
₦80,000. Calculate the APC and APS
SOLUTION
APC= =
APS= =
=
=
APS+APC= + =1
The average propensity to save or consume shows the percentage of income consumed or
saved at each level of income.
Marginal propensity to consume (MPC): It is the ratio of the change in consumption to change
in income. MPC=
Where
=change in consumption
Y= Change in income
MPC is the slope of the consumption function and it is ‘b’
Marginal propensity to save (MPS): Is the ratio of change in savings to change in income.
MPS=
Where
change in saving
Y= Change in income
MPS =1-b
MPS+MPC=1
Example: Given the following in Naira
Year
2001
2017
Income (Y)
20,000
30,000
Consumption (C)
12,000
20,000
From the table above calculate MPC and MPS
Solution
Y=30,000-20,000=10,000
C=20,000-12,000=8,000
S=10,000-8,000=2,000
MPC=
=
=
MPS=
=
=
Savings (S)
8,000
10,000
MPC+MPS= = + = 1
SIMPLE THEORY OF AGGRGATE DEMAND
Using a simple theory of a closed economy
Y=C+I+G……………1
Where Y=National income
C=Consumption expenditure
I= investment expenditure
Yd=Y = C+I…………….2
Introducing consumption function
C=a+by………………..3
Y=a+by+I………………4
Collect like terms
Y-bY=a+I………………5
Factorize the left hand side
Y (1-b) =a+I…………….6
Divide both sides by 1-b
Y=
………………7 Equilibrium level of income
Numerical example, given Y=C+I
Suppose that the following conditions are also given
I=₦20,000, C=10+0.6Y
Calculate the aggregate demand and consumption level
Solution
Y=C+I
Y=a+bY+I
Y=10+0.6Y+20
Collect like terms
Y-0.6Y=10+20₦
Y (1-0.6) =30
0.4Y=30
Divide both sides by 0.4
=
,Y=₦75million (equilibrium level of aggregate demand)
Consumption
C=a+by
C=10+0.6Y
C=10+0.6(75)
C=10+45
C=₦55 million (consumption level)
THE MULTIPLIER THEORY
The multiplier principle was developed by Lord RF Kahn in the early 1930s. The principle
compares the relative size of an initial increase investment and total ultimate increase in
income. Multiplier is simply the figure by which an increase in total expenditure in the country
may be multiplied to get the resulting increase in the national income.
The multiplier is denoted by K and calculated with the aid of the formula:
1. K=
=
2. K=
Where K= multiplier
MPC=Marginal propensity to consume
MPS= Marginal propensity to save
= Change in national income
C =Change in consumption expenditure
Example: If the marginal propensity to consume is 0.8, (a) calculate the multiplier.
(b.) By how much must consumption expenditure be increased to increase income
by ₦10,000?
SOLUTION
(a) K=
=
=
=5, the multiplier is 5
(b) Since the value of multiplier is 5
K=
, =
5C=10,000
C=
= ₦2,000
2. Given that MPC is 0.75 by how much will national income increase if government
expenditure is increased by ₦8million
Solution
K=
=
=
=4
K=
Y =4×8million= ₦32 million
The national income will increase by ₦32 million
DEMAND FOR MONEY
Demand for money: is also known as liquidity preference. Demand for money refers to the
desire to hold money; it is keeping of resources in liquid form. Demand for money is a derived
one.
REASONS FOR HOLDING MONEY
Lord Keynes postulated three reasons for holding money
a. Transaction motive: this is the desire to hold cash to meet with day to day transaction
on current expenditure such as buying of food stuff, daily transportation to work etc.
Business organization also keep some money in cash to meet day –to-day expenditure
such as maintenance, fuel, entertainment, etc most of which involves small amount of
money.
b. Precautionary motive: this refers to the desire to hold cash in order to meet up with
unforeseen circumstances such as emergencies, illness, accident etc. firms also hold
cash demand for various departments, replacement of broken spare part. etc
c. Speculative motive: it is a business motive and refers to the desire to hold cash balance
in order to embark on speculative dealings in the bond market. This has to do with
money held for the purpose of avoiding capital losses in a declining security market.
FACTORS AFFECTING THE DEMAND FOR MONEY
a. Income: Demand for money varies directly with the level of income, that is the higher
the income, the higher the demand for money.
b. Interest rate demand for money varies inversely with interest rate.
c. Price level: there is direct positive relationship between money demand and price level
d. The rate of price change: inflation varies with money demand. It is a weak determinant
of demand.
e. Real permanent income or wealth: real permanent income or wealth varies directly with
demand for money.
f. Returns on bonds and equities: the higher the return on bonds and equities the lower
the demand for money.
SUPPLY OF MONEY
The supply of money refers to the total amount of money available for use in the economy
at a given period of time. It comprises
a. Currency in the form of bank notes and coins circulating outside the banking system.
b. Bank deposit in current account which are withdrawable by cheque (i.e. demand
deposit or bank money)
FACTORS AFFECTING THE SUPPLY OF MONEY
a. Bank rate: Bank rate is the rate of interest the central bank charges the commercial bank
for lending money to or from them and discounting their bills. Expansionary bank rate will
increase the supply of money while restrictive bank rate will reduce the supply of money.
b. Cash reserve (cash ratio) : it is the percentage of the deposit of the commercial banks are
expected to keep with the central bank, if the reserve requirement is high, money supply
will be low and vice versa.
c. Economic situation: during the period of inflation in an economy, the central bank will
reduce the supply of money and decrease it during the period of deflation.
d. Total reserve of the central bank: if the total reserve supplied by the central bank is high,
money supply will be high and vice versa.
VALUE OF MONEY
Value of money is defined as the quantity of goods and services which a given amount of
money can buy. This is what is called the “purchasing power” of money, when prices are
high a given amount of money will buy less quantity of goods but prices are low a given
amount of money will buy more quantity of goods. Therefore the value of money is
inversely related to price level. The higher the price level the smaller the quantity goods
and services that a given amount of money can buy and therefore the lower the amount of
money conversely , the lower the general price level, the greater the quantity of goods and
services money can buy and the higher the value of money.
FACTORS THAT DETERMINE THE VALUE OF MONEY
a. The price level: the value of money varies inversely with price level.
b. The supply of money or the amount of money in circulation: when a given quantity of
money in circulation increases, while there is little or no corresponding increase in the
available quantity of goods and services, this would mean that a larger quantity of
money would purchase fewer commodities, the value of money would therefore be
low.
c. The velocity of circulation of money: the velocity of money in circulation refers to the
speed at which the stock of money circulates within the economy by changing from one
hand to another in a given period usually one year to consummate business transaction,
when there is an increase in the velocity of money in circulation, price of goods and
services increases leading to low value of money.
d. Inflation and deflation: during the period of inflation then value of money is always low
while during the period of deflation the value of money is always high.
e. Volume of goods and services: when more goods and service are available while the
supply of money is constant, the value of money will increase in an economy, because
you will buy more goods with little amount of money.
QUANTITY THEORY OF MONEY
Quantity theory of money is defined as the relationship between the quantity of money
in circulation in an economy and the price level
The theory tries to explain when there is an imbalance between the demand for money
(by households and firms) and the supply of money to the economic units. It explains
that if people hold more money than they require (ie excess supply over demand) they
will spend the money on currently produced goods and services this will lead to
increase e in price level.
Professor Irving Fisher expressed the quantity theory of money in the form of an
equation known as equation of exchange represented as MV=PT. Where
M=supply of money
V= velocity of money in circulation (the speed at which money changes hand in an
economy).
P=price level
T=total amount of transaction or quantity of goods
He assumed constant velocity of circulation of money (V) and total transaction (T). Hence the
equation of exchange is re-stated as MV=PT.
Given the above equation as re-stated, the amount of money in circulation (money supply) is
directly related to the price level. If the supply increases, the price level will increase and if the
money supply is reduced, there will be a fall in the price level.
PRICE LEVEL
Price level is the price of goods and services. Price level varies inversely with value of money. If
the price level increases, it means that a given sum of money would buy fewer goods and
services, therefore the value of will fall with an increase in the price level and vice versa.
MEASUREMENT OF VALUE OF MONEY
The value of money is measured by using price index, it is calculated as
Price index=
×
Example: Assuming that the price of a bag of rice was ₦8,000 in the year 2015, and in the
year 2016 the price increased to ₦17,000 per bag. Calculate the price index.
Solution
Price index=
×
×
=212.5%
212.5%-100%=112.5%, the value of money has fallen by 112.5%.
INFLATION
Inflation can be defined as a situation where there is a continuous or persistent rise in the
general price level of goods and services overtime, as a result of large volume of money in
circulation.
Inflation arises when there is excess supply of money over the supply of goods and services
which money can buy, that is too much money chasing too few goods.
Deflation on the other hand can be defined as the persistence or continuous decrease in
the general price level of goods and services. This is caused by fall in demand for goods and
services as a result of scarcity of money. This is usually experienced during economic
depression.
TYPES OF INFLATION
iii.
Demand pull inflation: This is the type of inflation that arises as a result increase in
demand without a corresponding increase in the supply of goods and services. This
can be illustrated in the diagram below.
From the diagram above, at price p1 the quantity demanded and supplied is Q1, when
the demand changes from D1D1 to D2D2 that is positive shift in demand, a new price
arises as shown in P2 and supply remains constant, when the demand shift to D 2D2 and
D3D3, the price rises to P2 and P3 respectively.
CAUSES OF DEMAND PULL INFLATION
i.
Increase in bank lending on activities which do not contribute to increase in output of
goods.
ix.
Government adopts a deficit financing or budget to provide social infrastructure.
x.
War time expenditure which may increase purchasing power in a situation of supply
of goods.
xi.
Increase in wages and salaries of workers not accompanied by increase in output.
xii.
Expectation of a future rise in prices.
xiii.
Misallocation or miss appropriation of fund.
xiv.
Democratization process which increases government expenditure.
xv.
Increase in population not accompanied by increase in productivity.
COST PUSH INFLATION
Cost push inflation occurs as a result of increase in cost of production for example, payment
for labour ,cost of raw materials, cost of equipment used in production etc. when the cost
of production increases, it will affect the production of goods and services, since the aim of
a producer is to maximize profit, the producer has to increase the price of his goods and
services and the quantity of goods and services produced will reduce as illustrated below.
S
S
P2
P1
From the curve above diagram the demand curve is constant while there is a shift in supply
curve from S0S0 to S1S1 leading to decrease in quantity from Q2 to Q1 and an increase in price from P1 to
P2.
CAUSES OF COST PUSH INFLATION
i.
i.
ii.
iii.
iv.
v.
Increase in cost of production as a result of increase in wages, raw materials, transport etc.
Increase in interest rate on loans will raise cost of production.
Increase in cost of imported input.
Devaluation or depreciation of a local currency may also increase the cost of inputs.
Inadequate infrastructure such as electricity poor transportation and water supply which
increase cost of production.
Excess government taxes on inputs.
3. Hyper inflation: It is also known as the galloping or run-away inflation, this is the
extreme form of inflation in which money losses its value or purchasing power. This type
of inflation is not common, it is caused by war, deficit budget etc. during this period of
inflation average price level rises to the tune of 2 to 3 digits.
4. Creeping inflation: It occurs when there is a slow but steady rise in the general price
level of goods and services.
5. Artificial inflation: This type of inflation arises as a result of hoarding of goods either by
the producer or middlemen, thereby creating artificial scarcity with the intension of
increasing the price and making more profit.
CAUSES OF INFLATION
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
Low production: Decrease in production of goods and services leads to their scarcity and
when supply cannot meet up with high demand inflation sets in.
Increase in demand: When the demand for goods and services is greater than supply, this
result in inflation.
Increase in salaries and wages: When salaries and wages are increased without a
corresponding increase in the supply of goods and services it can lead to excess money in
circulation- more money chasing few goods.
High cost of production: When there is high cost of production, when manufacturers
produce they will increase the price of their goods and push it to consumers.
Budget deficit: When government expenditure is more than its revenue it is budget deficit
and this leads to inflation.
Over population: A sudden rise in the population will result to a corresponding rise in
demand for goods and services and if there is no corresponding rise in supply of goods and
services. It will lead to inflation.
Poor weather and natural disaster: Poor weather reduces the quantity of agricultural
produce and natural disasters like flood, earth quake, drought, pest and diseases also
reduce the agricultural produce and product causing inflation.
Industrial strike: Prolonged strike can cause scarcity of goods and services leading to
inflation.
EFFECT OF INFLATION
The effect of inflation is divided into two
Positive effect
i.
ii.
iii.
iv.
It encourages greater outer output: Higher prices of goods and services during inflation
encourage producers to embark on large scale production resulting to greater output.
Higher tax yield: As a result of high volume of money in circulation, government is able to
realize high yield from tax.
High profit: Businessmen and women earn higher profit because of rising prices of their
product, whatever is produced there is usually a favourable market for it, since producers
make profit out of the goods they produce and sell, and they are encouraged by the huge
profit, to produce more with the view to making more profit.
Inflation induces employment: Since producers are forced by the profit motive to produce
during inflation, they need to employ more workers.
v.
Inflation favours debtors: Since the value of money falls during inflation those who owe
others will have to pay less in terms of real purchasing power and because there is too much
money in circulation, they will be able to pay their money at ease.
Negative effect of inflation
I.
ii.
iii.
iv.
v.
vi.
Inflation discourages savings: During inflation people spend more money in buying goods
and services and nothing is left for saving, saving will be meaningless, since money losses its
value during inflation and money is better stored in commodity form, since the values of
commodities will always appreciate.
Fall on standard of living: During inflation the standard of living of fixed income earners falls
as a result of increase in prices of goods and services.
Creditor’s loss: The value of money received is usually less than the value of money lent out.
It discourages export: High prices discourage export because the goods to be exported will
be expensive during inflation.
Loss of value of money: Money losses its value during inflation.
Consumers suffer: Consumers will suffer as a result of high in price.
CONTROL OF INFLATION
I.
II.
III.
IV.
V.
VI.
VII.
Use of fiscal policy: Fiscal policy such as taxation and government expenditure could be
used. Increase in tax will reduce the money in circulation and reduction in government
expenditure by using surplus budget will control inflation.
Use of effective price control: It involves fixing maximum prices on certain essential
commodities in order to maintain the price level.
Use of restrictive /contractionary/tight monetary policy: Increase in bank rate, sales of
treasury bills (open market operation), special deposit etc can help to control inflation.
Removal of bottle neck in distribution channel: Government can curb inflation by providing
storage facilities, good roads, transportation network etc in the distribution system.
Avoiding industrial strike: Strike hinders the progress of production, to avoid inflation,
industrial action need to be avoided.
Use of modern technology: Use of modern equipment like plough, planter, harvester, etc
will increase production and make more goods available thereby curbing inflation.
Industrialization: It will reduce over-reliance on imported goods and bring about increase in
output which will reduce price of goods.
HUMAN CAPITAL
Human capital is the stock of competence, skills, knowledge, and technical know-how, social and
personal attribute including creativity embodied in the ability to perform labour so as to produce
economic value.
Characteristics of human capital.
i.
ii.
iii.
iv.
v.
Human capital is mobile and portable: It can easily move from one place to another.
Human capital has feeling: Human capital cannot be used anyhow its consent needs to be
sort for.
It is an intangible asset: The stock of one’s knowledge and competence cannot be seen until
it is displayed.
It is perishable: knowledge can diminish overtime as a result of continued unemployment,
under employment age and death.
Competence: Human capital has the ability to perform labour so as to produce economic
value.
Factors affecting the efficiency of human capital
i.
ii.
iii.
iv.
v.
vi.
Better education and training makes human capital to more productive.
Management and leadership style: Good management and leadership style make human
capital to be more productive.
Suitable working environment: A good working environment induces worker to work hard.
Job satisfaction
Appropriate and basic incentives will encourage hard work.
Good health condition improves better working condition.
DISTINCTION BETWEEN HUMAN CAPITAL AND PHYSICAL CAPITAL
Human capital
Physical capital
Human capital is portable and mobile.
Physical capital is mostly fixed and bulky
Human capital has feeing.
Physical capital does not have feeling because it
is not a living thing.
The stock of human capital (knowledge and
competence) is intangible.
The stock of physical capital is intangible.
Human capital is perishable as a result of death.
Physical capital is durable and can last for long
period of time.
Human capital is only hired but no bought.
Physical capital can be bought.
BRAIN DRAIN
B rain drain refers to the loss of skilled intellectuals and technical labour through the movement of
labour to more favourable economic, geographic or professional environs.
Brain drain which is synonymous to human capital flight is the large scale emigrant of large group of
individual with technical skill or knowledge. It is more frequent from developing countries to
developed countries.
Causes of brain drain
i.
vi.
vii.
viii.
ix.
x.
xi.
xii.
xiii.
xiv.
Political instability: It makes people to lose confidence in their government and future
prospect for a better life.
Lack of academic freedom and collapse of tertiary education.
Unemployment and low salaries.
Collapse of local industries.
Hardship and paralysis ushered in by structural adjustment programme kin Nigeria.
Lack of realistic and accurate human resource plan and policies.
Large technological gap and inadequate technological capacity.
Rise in authoritarian regime.
Inadequate professional and care opportunities.
Restrictive trade practices of the developed nation that strangles the development of
developing nations.
Effects of brain drain
xvi.
xvii.
xviii.
xix.
xx.
Brain drain deprives Nigeria of valuable personnel that would have contributed to the
economic development
It creates vacuum in which a large sum of money is used to employ the service of
expatriates.
The loss of valuable personnel gives rise to poor leadership and corruption.
It leads to slow pace of economic growth and development.
It causes capital flight.
Arresting brain drain
The following are the ways through which brain drain can be arrested.
i.
ii.
iii.
iv.
Good governance at all levels
Right government policies.
Offering higher wages to insiders according to their qualification is essential instead of
overestimating and hiring expatriates which is more costly.
Revitalization of educational system to offer necessary and quality education in the home
country.
v.
vi.
vii.
viii.
Withholding of academic certificates until the graduates return and are willing to serve the
people (government).
High tax on emigrants who are indigenously trained at home.
A deal should be made between the rich and the poor nations that prohibit the rich nation
from taking the intellectuals of the poor nations.
Revamping of the collapsed industries in order to create more employment opportunities.
PETROLEUM IN NIGERIA
The history of oil industry in Nigeria is as old as the country itself. Oil exploration in Nigeria dates
back to 1908 with the appearance of oil at Aroromi in the present Ondo state. A German company –
Nigeria –Butmen Corporation started this pioneering effort that was short-lived as a result of
outbreak of the 1914-1918 First World War. In 1956 Shell B.P discovered its first commercial crude
oil in the country at Oloibiri in the present River state. Since then till date petroleum has remained
the major source of government revenue.
Positive contribution of petroleum
i.
ii.
iii.
iv.
v.
vi.
vii.
Source of government revenue: Petroleum has contributed greatly to the major source of
revenue available to the government.
Generation of employment: it has generated employment in field of engineering, geology,
chemical engineering.
Infrastructural development: The revenue generated from petroleum industry is used for
the development of infrastructure such as road, airports, seaports etc.
Source of foreign exchange: Petroleum plays a vital role as source of foreign exchange to
Nigeria.
Establishment of oil related industries: Other oil related industries such as petrochemical
industry have been established.
Improvement of standard of living: Petroleum industry, through the provision of
employment has increase per-capita income and development of infrastructure.
Major source of energy: Through petroleum we get petrol, diesel, kerosene, e.t.c as a source
of energy.
NEGATIVE CONTRIBUTION OF PETROLEUM
i.
ii.
Environmental pollution: Oil exploration has led to serious environmental pollution such as
land pollution, water and air pollution in the Niger Delta region.
Increased social vices: The discovery of oil in the country has led to increased social vicescorruption, pen robbery e.t.c.
iii.
iv.
v.
vi.
vii.
Development of mono economy: Nigeria now relies solely on crude oil as her solely on crude
oil as her major source of revenue.
Rural-urban migration: It has led to the movement of able-bodied youths from the rural to
urban centre in search of non-existing jobs.
High rate of inflation: The money realized from petroleum is also much that there is excess
money chasing few goods.
Political instability: Oil discovery in Nigeria has led to social insecurity in Niger delta as they
are always at war with other groups.
Neglect of Agricultural sector.
ROLE OF NIGERIAN NATIONAL PETROLEUM CORPORATION (NNPC)
The Nigerian National petroleum Corporation (NNPC) was established in 1977, and charged with the
development and management of Nigeria’s petroleum resources.
The roles of NNPC include:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
Regulatory function: The Nigerian National Petroleum Corporation was set up to regulate
the activities of the oil companies in Nigeria e.g issuance of license for oil exploration, oil
prospecting, operation of filling station etc.
Exploration of oil: NNPC is also charged with the sinking and controlling of its own oil wells
with the purpose of producing crude oil.
Petroleum production: NNPC is responsible searching for the presence of oil.
Petroleum refining: NNPC also refines petroleum in order to get its products like petrol,
kerosene, diesel, cooking gas e.t.c.
Oil transportation: NNPC transports crude oil and refined products from areas of production
to areas where they are needed by the use of tankers and pipelines.
Marketing of petroleum product: NNPC is also responsible for the distribution and
marketing of petroleum product.
Employment
Manpower development
ROLE OF THE ORGANIZATION OF PETROLEUM EXPORTING COUNTRIES (OPEC)
Formation
The organization of Petroleum Exporting Countries (OPEC) was established in 1960 in Baghdad (Iraq) by
five main oil exporting countries: Iran, Iraq, Kuwait Saudi Arabia and Venezuela. It was the exploitative
tendencies of the multinational companies that led to the formation of OPEC. The organization was able
to maintain oil price stability and this led to the joining of thirteen countries, they are Qatar (1961),
Indonesia (1962), Libya (1962), United Arab Emirate (1973), Algeria (1969), Nigeria (1971), Gabon (1973)
and Ecuador (1973).
The organization’s secretariat and head quarter is Vienna (Austria).
Aims and objectives of OPEC
i.
ii.
iii.
iv.
v.
vi.
To maintain stability of oil price: One of the main objectives of OPEC is to maintain the
stability of oil price in the world market.
To ensure steady supply of oil: To ensure that there is steady supply of oil in the world
market.
Encouragement of exploration and development of petroleum resources: OPEC ensures
that member countries are encouraged in the exploration, exploitation and development of
petroleum resources.
Stabilization of oil income: The organization was set up to ensure stabilization of oil income
of its member nation.
Co-ordination of petroleum policies: OPEC is also to ensure the coordination of petroleum
policies of member countries and to improve their bargaining power.
Allocation of production quota: It fixes and allocates production quotas to member nation.
ACHIEVEMENT OF OPEC
i.
ii.
iii.
iv.
v.
Establishment of common fund: This fund has helped to alleviate the financial problems of
members at one time or the other.
Formation of common forum: This organization created a forum whereby problems
confronting member states of OPEC can be resolved amicably.
Regulation of production: The organization to a large extent has succeeded in allocating
production quotas to member state.
Regulation of price: It has also succeeded in ensuring that price of crude oil is regulated and
stable.
Encouragement of oil exploration: The organization has been encouraged to participate in
oil exploration.
PROBLEMS OF OPEC
i.
ii.
iii.
iv.
v.
vi.
Rivalry in leadership
Entry of non –OPEC members into oil industry.
Decline of loyalty of member nation
Stockpiling of oil by advanced nations.
Fall in prices of oil
Political disagreement
SOLUTIONS TO THE PROBLEMS OF OPEC
i.
ii.
iii.
Imposition of penalties
Joint research
Strengthening of unity among member nations
iv.
v.
vi.
Fixing of production quotas
Rotation of leadership position
Maintenance of reasonable oil price.
FUNCTIONS OF OPEC
i.
ii.
iii.
iv.
v.
One of the functions of OPEC is to protect the interest of its members.
It has helped in the stabilization of the world oil prices thereby preventing world
fluctuations in oil prices and output.
It has been responsible for seeking favourable markets for oil produced by its members.
The existence of OPEC has led to improved trade relations among members and the
international community as a whole.
OPEC provides employment for many people especially from the member nations.
OPEC helps to educate its members and the international community through its regular meetings
where issues are thoroughly discussed and communiqués issued.
FINANCIAL MARKET
It is possible to dichotomize the Nigerian financial market in to two, namely the money
market and Capital market. The markets are designed to channel resources from the surplus
to deficit sector of the economy.
MONEY MARKET
Money market can be defined as a financial market in which funds for short term
investment are borrowed and lent. A lot of financial institutions are involved in this type of
market and it is controlled by the Central bank
INSTITUTIONS INVOLED IN MONEY MARKET
i.
ii.
iii.
iv.
The central bank
Commercial bank
Discount house: These are institutions that discounts, buy and sell bill of exchange
and treasury bills. These houses pay for bills before their maturity dates, though
not their full values of the bills (discount) act as their commission.
Acceptance houses: These are financial institutions that make fund available for
international trade. They lend their weight on bills used in settling debt in
international trade which other financial institution both local and foreign will
accept as genuine. The acceptance houses do this acceptance by signing their
v.
vi.
signature on the face of the bill and charge the appropriate commission for
services rendered.
Finance houses: these are financial institutions formed purposely for the financing
of hire purchase deals. They buy commodities on the request of consumers from
sellers or manufacturers and resell the commodities to the consumers on hire
purchase.
Insurance company: they are regarded as money market because they collect
money from clients as premium in order to insure their lives or properties. This
money they collect is lent out to members of the public on short term loan.
Instrument used in the money market
i.
ii.
iii.
Treasury bills: Are normally issued by the central bank of a country which assists
the government to borrow money from the money market on short term basis.
Bill of exchange: It is a promissory note which shows the acknowledgement for
indebtedness by a debtor to his creditor and his intension to pay the debt on
demand or an agreed time in future normally ninety days.
Call money fund: This is a special arrangement in which the participating
institution invests surplus money for their immediate requirement on an overnight
basis with the interest and withdraws on demand. The call money has an
advantage of early return and at the same time is withdrawalable on demand; it
provides solution to the immediate stock of liquidity pressure in the money
market.
FUNCTIONS OF MONEY MARKET
a. Promotion of an efficient allocation and utilization of funds in the economy thus
ensuring non-existence of idle cash
b. Help the commercial banks to hold lower cash reserve through provision of numerous
investment outlet- treasury bills, call money fund, treasury certificate etc.
c. Act as an important source for short term borrowing to the government.
d. Provision of an avenue for the implementation of government monetary policy.
e. Provision of forum for fund mobilization and allocation in the economy.
f. Provision of opportunity for investment in fairly liquid and riskless assets.
g. Help to indigenize the credit base of the economy through then provision of Nigerian
security.
h. Help banks to invest their surplus fund in earning assets and thus minimizing their
cash holding.
i. Gives central bank signal with respect to shortage /surplus of fund in the economy
through the prevailing interest rate.
CAPITAL MARKET
Capital market can be defined as a financial market in which funds for medium and long
term investments are borrowed and lent.
There are two aspects of the market.
a. Primary market: The primary market is concerned with the issue and sales new
securities ie first hand securities. It is dominated by stock brokers, merchant banks,
commercial banks, merchant banks, central bank and government.
b. Secondary market: It is the financial market that deals with the buying and selling of
old second hand securities. It is dominated by the stock exchange.
Institutions involved in capital market
Issuing houses, development bank, building society, National Provident Fund (NPF) and
stock exchange.
INSTRUMENT USED IN THE CAPITAL MARKET
a. Shares: these are financial instruments utilized in the capital market for long term
investment. A share is a portion of capital of a limited liability company owned by an
investor, whose reward is dividend.
b. Bonds: These are long term security used to source for funds. Bonds may be issued
by firms, financial institutions or governments. Bonds issued by the government are
generally regarded very safe. It is also known as certificate of indebtedness.
c. Treasury certificate: These are government securities which mature after a year. They
are issued by the government through the central bank to either borrow or lend
money in the capital market.
d. Debenture: These are secured loan raised by a company usually with fixed interest
rate and sometimes fixed redemption date.
Stock exchange
The stock exchange market is a highly organized market where investors can buy and sell
existing securities like shares stock, debentures etc.
Nigerian stock exchange was established in 1960 through the Act of parliament.
Dealers in the stock exchange
a. Stock brokers: They deal directly with the public, they act as their agents who buy and
sell on their behalf and offer them advice, and they charge commission for their
function called brokerage.
b. Jobbers: This is the main dealers of the stock exchange. They do not deal directly with
the members of the public but with brokers. The brokers request from the jobber for
his price for a particular security. They quote the price, a high price for selling and a
lower price for buying. His profit is known as “jobbers turn”. This is the difference
between selling and buying price.
FUNCTIONS OF THE CAPITAL MARKET
a. It provides local opportunities for borrowing and lending for long term purposes.
b. Enables the authority to mobilize long term capital for economic development in the
country.
c. Provides foreign business with the facilities to offer their shares, and the Nigerian public
the opportunity to invest and participate in the shares and ownership of foreign business.
d. Provides facilities for quotation and ready marketable of shares and stocks
e. Maintain discipline in the market through introduction of code, checking of abuses and
regulating the activities of the operators in the capital market.
Provides a healthy and mutual acceptable environment for participation and co-operation
in indigenous and expatriate capital in the joint effort to develop the Nigerian economy to
the mutual benefit advantage of both parties through participation and ownership
MANUFACTURING AND CONSTRUCTION
Manufacturing industry comprises of all forms of production which transforms materials
into finished and semi-finished forms. Goods produced at this stage include both
consumer and producer goods. Examples of manufacturing industries include textile
industry, pharmaceutical industry etc.
Construction industry comprises all forms of production which assemble different
components into a unified whole as well as transformation of materials to structure. For
example construction of houses, roads, bridges dams etc.
ROLE OF MANUFACTURING AND CONSTRUCTION
I.
Employment opportunity: Manufacturing and Construction have employed a lot of
skilled and unskilled labour.
II.
III.
IV.
V.
Promoting entrepreneurship and innovation: Manufacturing and construction
have been promoting entrepreneurship and innovation. Manufacturers are also
encouraged to be entrepreneur and not to depend on non-existing job.
Adding value: Essential values are added to goods, through increasing the quality
and specification of the products, providing the superior level of service in
providing the product, through marketing.
Improving the standard of living: Through construction of road, cars building etc
life is enjoyable. All these will equally reduce cost of production and improve
standard of living.
Economic growth and development: Through manufacturing and construction, we
have real goods with monetary value. Since these goods are manufactured within
the economy, they increase economic growth, thereby leading to economic
development.
SERVICE INDUSTRY
The service industry is classified under the tertiary production. They provide services to
people such services include banking, tourism, insurance, transportation etc.
i. Transportation: This is a means whereby people and goods are moved from one place
to another and transport is divided into land, water, air and pipeline.
c. By land: we use motor vehicles, bicycles, motor cycle and train.
d. By water: We use canoes, engine boats, ferry boats, passengers and cargo liners,
steamers and tramps.
e. By air: We make use of aeroplane and helicopter. Air transport is the fastest means of
travelling long distance journey.
f. By pipeline: This is a means of travelling liquid goods for example oil (petroleum), gas
etc. through pipeline under the ground.
2. Banking: A bank is an institute set up purposely for safe keeping of money, valuables
goods and documents like will others. Bank accept deposits from members of the
public, through savings, current and fixed deposit account. They grant credits with the
help of loan and overdraft.
3. Insurance: This is a provision made for the protection of persons or objects against
risk. In a bid to reduce the risks that face man in his daily activities, man signs
insurance contract with an insurance companies for the protection of his life and that
of his properties against insurable risks. Man pays premium to the insurance company
and the company compensates (indemnifies) the individual.
4. Advertising: This is a means of bringing the existence of production of new goods and
services to the knowledge of members of the public and to persuade them to buy and
use the goods and services. Through advertising, information is passed and awareness
is created about the existence and production of goods and services. Advertising is
divided into persuasive, competitive, and informative, direct and indirect. It can be
carried out through the following media or methods: Radio, television, newspaper,
magazines and journals, hoarding, cinema, catalogues and price list, leaflets handbills
and circulars, mobile shops and loud speakers etc.
5. Warehousing: This is the act of storing goods produced ahead of demand, until the
time they are needed. Ware housing of goods makes it possible for production to
continue. Ware houses are divided into ordinary, bonded, state and public warehouse
TYPES OF WARE HOUSES
a. Ordinary ware house: This is a ware house where the wholesaler stores the goods
until they are needed and sold to retailers or agents.
b. Bonded warehouse: It is a place government keeps goods, whose owners have not
paid their required duties. As the name suggest, it is hired from individuals who sign
bonds with the government not to release the goods until government gives them an
indication that the duties on them have been paid.
c. State ware house: Also known as Queen’s ware house especially in Britain and other
countries under them. It is a place where contraband, seized by the board of customs
and excise are kept until they are sold on auction to members of the public. This ware
house is owned by the government
d. Public ware house: These are privately owned ware houses, that are meant for
renting purposes, such ware houses are found near docks, railway station, airports
etc. public ware houses are used by the renters, for a short period to store goods that
are in transit from one location to another.
TOURISM
Tourism deals with travelling for recreational, leisure or business purpose. The tourist
industry provides centre for tourism and sightseeing such as Nike Lake, Obudu cattle
ranch, Yankari Game Reserve in Bauchi, Zuma Rock in Suleja, Olumo Rock in Ogun State.
IMPORTANCE OF TOURISM TO THE ECONOMY
g.
h.
i.
j.
k.
Foreign exchange earnings.
Job opportunities.
Improved transport system
Improved commercial activities.
Improved social services.
l. Improved standard of living.
m. Income to government and individuals.