Cluster Analysis on the Effect of Dollar Increment on the Economy of Nigeria

Cluster Analysis on the Effect of Dollar Increment on the Economy of Nigeria

Chapter One

Aims and objectives of the study

The major aim of this study is examine the effect of dollar increment on the economy of Nigeria. Other specific objectives of this study include the following;

To examine the present state of the economy.
To examine the relationship between dollar increment and economic development of Nigeria.
To recommend ways of improving the value of the Naira against the dollar.

CHAPTER TWO

LITERATURE REVIEW

THEORETICAL FRAMEWORK

THE PURCHASING POWER PARITY THEORY

The purchasing power parity (PPP) is one of the earliest and perhaps most theory of exchange rate between two currencies would be equal to the relative national price levels, it assumes the absence of the trade barriers and transactions cost and existence of the purchasing power parity (PPP). In it’s version the purchasing power parity (PPP) doctrine equates the equilibrium exchange rate of the ratio of domestic to foreign price level (Lyon, 1992).

The purchasing power theory parity theory defines two equilibrium rate systems. The first is the short run equilibrium exchange rate which is defined, in this context, as the rate that would exist under a purely freely floating exchange rate balance. Second is the long-run equilibrium that would yield balance of payment equilibrium over a time period in cooperating and cyclical fluctuations in the balance of payments (including those of prevailing exchange rate from the relative purchasing power in a currency are generally attributed to problem of arbitrage and expectations in the goods market. Some4 of the assumption of PPP theory however are quite unrealistic.

Efficiency level for examples varies from country to country and as such there are deferring cost functions. To align international comparisons on the assumption of some technological efficiency in all countries could be deceptive. Again the choice of the base year for the relative purchasing power parity (PPP) is often arbitrary. Finally, PPP is often presented as if causality runs from price level to exchange rate. Actual experiences are often more complicated when monetary / fiscal policies move both causality could be quite exogenous or bi-directinal (Argy and Frenkel, 1978: 4)

THE TRADITIONAL FLOW MODEL

The traditional flow model, views exchange rate as the product of the interaction between the demand for and supply of foreign exchange (Augustus, 2003,:105). In this model, the exchange rate is in equilibrium when supply equals demand for foreign exchange, (Olisadebe, 1991:56). The exchange rate adjust to balance the demand for foreign exchange depends on the demand domestic resident’s have for domestic goods and assets. On the assumption that the foreign demands for domestic goods is determined essentially by domestic income, relative income plays a role in determined exchange rate under the flow model. Since assets demand can be said to demand on difference between domestic and foreign interest rates differential is other major determinants of the exchange rate in this frame work.

Under the traditional flow model i.e. the balance of payments model, the exchange rate is assumed to equilibrate the flow supply of and the flow demand for foreign currency. The B.O.P by deficits (surplus) in current account is offset by surplus in (deficits) in the capacity account. The major limitation of the traditional model or the portfolio balance model include the over-shooting of the exchange rate target and the fact that substitutability between money and financial asset may not be automatic, this led to the development of the monetary approach.

THE ELASTICITY APPROACH

This approach merely restricts to trade invisible goods. According to this approach, the success of devaluation in improving the balance of trade, and the rough it the balance of payment depends upon the 19 demand elasticities of import and export of devolving country (Dewett, 1982:502). In other words, an improvement in the balance of trade will depend upon whether the demand for import and export is elastic. Devaluation makes import of the devaluing country costlier than before and in case her demand for imports is elastic, a higher amount will be adversely the balance of payment of the devaluing country. However, if her demand for exports is elastic then with a fall in the prices of exports as a result of devaluation, the foreigners, which in turn will help in resting equilibrium in her demand for imports is elastic, then the imports of the country will be significantly reduced by devaluing country. However, some rules are needed to relate the required degree of elasticities for the success of devaluation in improving balance of trade. In this connection will improve the balance of trade of country 20 of the sum of the elasticities of demand for assuming both elasticities of demand for assuming both elasticities are infinite.

Let Ex^d Em^d = price elastic of demand for exports and imports respectively Ex^s Em^s = price elastic of supply for exports and imports respectively. Then, according to learners conditions devaluation will increase a country’s balance of trade, Ex^d=Em^d >1 give infinite Ems. It should be emphasized that the marshal learners conditions relate. The response of capital should be taken into consideration before it can be determined whether devaluation will improve the balance of payments or not. This is because if sufficient amounts of autonomous capital flow into the devaluing country it would be possible to have the sum of elasticites of demand less than one and yet would aggravate the definition and investors fear further devaluation will not make any impact on the import and or export of the devaluing country her demand for imports and exports may elastic.

CHAPTER THREE

RESEARCH METHODOLOGY

INTRODUCTION

This chapter describes the various methods and techniques used to collect and analyze the data gathered for the study to gain a deeper understanding of the topic under study.

The data collection stage is important since the result of the analysis is dependent on the quality of the data obtained. Therefore, the method selected for data collection must be the most appropriate to assist in achieving the objectives of the study:

MODEL SPECIFICATION

The model for the study comprises of two constructs as described below:

MODEL 1

GDP= α+β₁ NEXR+ β₂IMPR+ β₃ EXPR + e——————————— (1)

Where

GDP signifies gross domestic product

NEXR signifies nominal exchange rate

IMPR signifies import rate

NEXR signifies export rate

α is the equation’s constant.

β₁ the coefficient of nominal exchange rate

β₂ the coefficient of import rate

β₁ the coefficient of export rate

e Is the error term of the equation

MODEL LIMITATION

The model is limited to only the above variable due to the unavailability of other statistical bulletin for other variables; but the research work was able to evaluate the effect of dollar increment on the economy of Nigeria.

Reason for the adoption of the model: The model was adopted because it will elicit information on the nature of the kind of relationship between the dependent variable and the rest of the independent variables as listed above.

THE VARIABLES

Dependent variables: The dependent variable is variable that other variables are dependent on; for the first model the dependent variable is the GDP (Gross domestic product)

Independent variable: these are those variables that are not dependent on any other variable; the independent variables for the model above are the nominal exchange rate, import rate and the export rate

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION

This chapter is devoted to the presentation, analysis and interpretation of the data gathered in the course of this study. The data was analyzed using the cluster method.

HIERACHICAL METHOD OF DETERMINING THE NUMBER OF CLUSTERS

CHAPTER FIVE

CONCLUSION AND RECOMMENDATION

This section of the study is sub divided into discussion of empirical findings of the study, conclusion of the study and recommendation of the study.

Discussion of finding

This study on the cluster analysis on the effect of dollar increment on the Nigeria economy was carried out to determine the effect of dollar increment on the Nigeria economy from 1985-2016. the following findings were made by the study;

All clusters from cluster 1 to cluster 33 are very far from the profile 1 which is the gross domestic product (GDP) from year 1980 to 2016 but closer to profile two which is the nominal exchange rate of the country.

Since all the clusters are very far from the GDP, but closer to the nominal exchange rate, it therefore means that the exchange rate has a significant effect on the gross domestic product of Nigeria from 1980 to 2016 that is to say that dollar increment has a negative effect on the economy as depicted by the very far values of the GDP to the clusters. Though cluster 1 is closer to profile two, cluster 7,8,9,10,11,13,14,15,16 and 17 are more closer to profile 2 (Nominal exchange rate) than other clusters. That is to say that the exchange rate from 1986 to 2016 was alarmingly high leading the indiscriminate increase of the dollar which leads to a massive reduction in the gross domestic product of the country over these years.

Conclusions

This research has been able to carry out a cluster analysis on the effect of dollar increment on the Nigeria economy ranging from 1985-2016. Justified conclusions were drawn based on the findings of the research.

Based on the analysis using the cluster method in the previous chapter, it can therefore be said that dollar increment influences the economy of Nigeria and that there is a relationship between dollar increment and the economy of Nigeria.

Recommendations

In connection to the findings of this research, the following recommendations are suggested:

The monetary authorities should employ every monetary tool to minimize the level of exchange rate fluctuations in the economy.
The policy of exchange rate flexibility should be maintained but with government intervention guide.
It is confirmed that external reserve curbs exchange rate fluctuations and thus the federal government should through the Central Bank of Nigeria increase the foreign reserve.

REFERENCE

Amache, R.C and Cerbich, H.H (1986). Principle of Macro Economics. Chinati: South Western Publishing Company.
Anuanwaokoro, M. (1999). Theory and Policy of Money and Banking. Hosanna Publication. Anyanwu, A. (1995). Fundamentals of Economics. Jonance: Educational Publisher Ltd. Onitsha.
Chinelo, I.M. (2006). Basic Statistics and Probability. Nigeria: Prince and Communication.
Cole, A. and Obstrald, S. (1991). The International Economy. London: McGraw Hill Inc. Denis, A. and Alfred, J. (1998). International Economics. New York, Irewin: C.B.N Publication.
Mankiw, N.G. (1994). Macro Economics. New York: Worth Publishers. Obandan, M.I (1993). Overview of Nigeria’s Exchange rate Policy and Management. Lagos: C.B.N Publications.
Oleka, P. (2004). Macro Economics Theory and Practice. Lagos: C.B.N Publication. Robert, J.C. (1998). International economics. United state: Little Brown and Company Inc.
Soludo, C.C. (1998). Macro-Economic Policy Modelling of African Economics. Lagos: Acena Publisher.

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