THE EFFECT OF EXCHANGE RATE ON THE NIGERIAN BALANCE OF PAYMENTS 1970-2010

ABSTRACT

This work sets out to examine the relationship between balance of payment and

exchange rate. The work is divided into five chapters; chapter 1 gives a general

introduction to the subject matter, chapter two gives the general review of literature

in the subject matter, chapter 3 gives or states the methodology and specifies the

model used for testing. Chapter four runs the required test and provides the result

as well as the interpretation and chapter five concludes the findings and

recommends policy for the government based on the findings in the test.The

ordinary least square regression (ols) method is used to test for R-squared test

(explanatory power of the variables), T-test for the reliability, F-test for the overall

significance of the exponentials and D.W test which is the econometric criterion

for testing for presence of auto regressive scheme. The result shows a negative

relationship between balance of payment and trade openness, also there exists a

positive relationship between exchange rate and foreign direct investment. Since

trade openness has a negative impact on the balance of payment it is recommended

that the government should not consider it a policy for economic development.TABLE OF CONTENT

Title page ------------------------------------------------------------- ------- i

Certification --------------------------------------------------------- ------- ii

Dedication --------------------------------------------- -------------- ------- iii

Declaration ----------------------------------------------------------- ------- iv

Acknowledgement -------------------------------------------------- -------- v

Abstract ------------------------------------------------------------- -------- vi

Table of content ------------------------------------------------------------ vii

CHAPTER ONE

INTRODUCTION

1.1 Background of Study --------------------------------------------- 1

1.2 Statement of research problem --------------------------------------- 2

1.3 Objective of the study --------------------------------------------- 3

1.4 Research Hypothesis ------------------------------------------------ 4

1.5 Scope of study ----------------------------------------------- -------- 4

1.6 Significance of study ---------------------------------------- ------- 4

CHAPTER TWO

REVIEW OF LITERATURE AND THEORETICAL FRAME WORK

2.1 Introduction------------------------------------------------------------- 7

2.2 Theoretical Concept in exchange rate------------------------ --------- 7

2.3 Literature Review ---------------------------------------------- --------- 82.3.1 Exchange system and monetary standards in Nigeria------- -------- 10

2.3.2 Types of Exchange rate--------------------------------------- -------- 23

2.3.3 Factors affecting rate of exchange -------------------------- ------- 26

2.3.4 Instruments of foreign payment ------------------------------- ------- 31

2.3.5 Foreign Exchange market------------------------------------- ------- 31

2.3.6 Theories of Rate of Exchange-------------------------------- ------- 33

2.3.7 Exchange rate policy in Nigeria------------------------------ ------- 36

2.4 Summary of Literature review-------------------------------- -------- 38

2.5 Theoretical Framework -------------------------------------- -------- 39

2.5.1 Balance of payment or modern theory----------------------- --------- 39

2.5.2 Features of Balance of payment------------------------------- -------- 41

2.5.3 Distinguishing between balance of payment and balance of trade-- 43

2.5.4 Components of balance of payment--------------------------------- 45

2.5.5 Disequilibrium in balance of payment ------------------------------ 46

2.5.6 Methods of correcting or adjusting disequilibrium---------------- 53

2.5.7 The effect of exchange rate devaluation on the balance of payment-- 55

CHAPTER THREE

METHODOLOGY AND MODEL SPECIFICATION

3.0 Methodology---------------------------------------------------------- 58

3.1 Model specification------------------------------------------------- 583.2 Estimation techniques and method of data analysis---------------- 59

3.2.1 Statistical test---------------------------------------------------------- 59

3.2.2 Economic A priori test----------------------------------------------- 61

3.2.3 Econometric Test------------------------------------------------------ 61

3.3 Source of Data required and data required------------------------ 62

CHAPTER FOUR

4.1 Presentation of Analysis---------------------------------------------- 64

4.1.1 Presentation of Result------------------------------------------------ 64

4.1.2 Interpretation of Result---------------------------------------------- 64

4.2 Evaluation Based of Statistical test---------------------------------- 65

4.2.1 Coefficient of Determinant----------------------------------------- 65

4.2.2 The T-test-------------------------------------------------------------- 65

4.2.3 The F test-------------AAA------------------------------------------------- 66

4.3 Economics criterion-------------------------------------------------- 664.4 Econometric test------------------------------------------------------ 67

CHAPTER FIVE

5.1 Summary of Findings------------------------------------------------ 69

5.2 Conclusion------------------------------------------------------------- 69

5.3 Recommendation----------------------------------------------------- 70

Bibliography --------------------------------------------------------- 72

Appendix ------------------------------------------------------------- 74